Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in the economic growth of any country. To encourage the development of these enterprises, the government provides various tax benefits to them. Read on to know more about the tax benefits available to MSMEs in more detail.
Tax Benefits of MSME in 2024
Here are the underlying tax benefits of MSME in 2024:
1. Reduced Corporate Tax Rates
One of
the most significant MSME tax benefits in recent years has been the
reduction in corporate tax rates. Many countries worldwide,
including India, have opted to lower the tax rate to encourage the
growth of small businesses. Under Section 115BA, small and
medium-sized enterprises that have an annual turnover over Rs. 50
crore can claim a lower tax rate of 25%.
Reduced corporate tax
rates not only free up additional funds for business growth but also
improve their overall financial health. With more resources at their
disposal, these enterprises can consider hiring highly skilled
employees, expanding their operations, or investing in innovative
technologies that can further spurt their growth.
2. Tax Deductions for Research and
Development
To encourage research and development
(R&D) activities amongst MSMEs, governments offer tax deductions
at 200% for sponsored research programmes under Section 35 (2AB) of
the Income Tax Act. In 2024, MSMEs can benefit from these deductions
by investing in such projects. This not only fuels innovation but
also results in potential tax savings.
Tax deductions for
R&D expenses can significantly reduce the overall tax liability
of MSMEs. This provides them with a competitive edge by enabling
them to allocate more funds toward research initiatives, product
development, and technological advancements.
3. Export Promotion Benefits
MSMEs
engaged in export activities can enjoy various tax benefits,
including reduced or zero-rated taxes on exported goods and
services. Additionally, export-oriented MSMEs may have access to
export credit schemes and financial support, further enhancing their
competitive edge in international markets.
Export promotion
benefits are instrumental in helping MSMEs expand their market reach.
By reducing the tax burden on exports, governments incentivise these
enterprises to explore new markets and increase their overseas sales,
ultimately contributing to the nation's revenue.
4. Start-up Tax Benefits
In India, the
government recognises the significance of start-ups in fostering
innovation and economic development. As such, it offers special tax
benefits tailored to start-ups, such as tax holidays, exemptions,
and credits. This includes tax exemption and tax holidays for three
consecutive years under Section 80 IAC and angel tax exemption under
Section 56 of the Income Tax Act. MSMEs that fall within the
start-up category can leverage these incentives to achieve and
maintain financial stability.
5. GST Benefits
The Goods and Services
Tax (GST) is a critical component of indirect taxation in India. In
2024, MSME tax benefits continued from GST-related measures,
including simplified compliance procedures, reduced tax rates on
specific goods and services, and threshold-based exemptions. These
GST benefits can streamline tax compliance for MSMEs and enhance
their competitiveness.
Reduced GST rates can directly impact the
pricing of goods and services offered by MSMEs, making them more
attractive to consumers. Additionally, simplified compliance
procedures reduce administrative burdens and allow MSMEs to focus on
core business activities.
6. Concessional Tax Rate
The
concessional tax rate is one of the significant tax benefits that
MSMEs can avail. To qualify for a concessional tax rate, a company
must have a turnover of up to Rs. 400 crores and be registered on or
after March 1, 2016. Under Section 115BA of the Income Tax Act, of
1961, MSMEs can enjoy a reduced tax rate of 25% instead of 30%, the
standard tax rate.
Meeting all eligibility criteria, MSMEs can
apply for a reduced tax rate of 22%. This rate applies to their total
income, excluding depreciation and deductions. You should also keep in
mind that companies availing of this tax rate reduction benefits are
exempted from alternate tax payments under Section 115JB.
7. Presumptive Tax Scheme
This scheme
of tax filing is simple and is designed to let eligible MSMEs
announce their income by analysing a certain percentage of their
total turnover. As per the recent announcement of the budget, the
eligibility criteria have been revised letting MSMEs enjoy more
benefits of this scheme. However, following this scheme, there is no
need to maintain records of detailed expenses, thereby making the
process easy and hassle-free.
8. New Benefits
As per the new budget,
eligible start-ups meeting the criteria are entitled to a three-year
tax incentive from the date of incorporation. This benefit is
applicable for the first 10 years.
According to the new
guidelines, for newly established domestic manufacturing companies,
tax rates have been reduced to 22%. MSMEs engaged in the
manufacturing of secondary steel will be exempted from customs
duties on steel scrap. Furthermore, the finance minister in the
Union Budget has planned to provide further relief to MSME secondary
steel producers.
Also Read - MSME Loan: Why it is an Ideal Choice for Small Business Owners
9. Income Tax Exemption
If you are
running a business for 7 years from the date of incorporation, you
are eligible for income tax exemption. However, the MSME income tax
exemption is applicable only for businesses under Section 80J of the
Income Tax Act.
10. Capital Gains Exemption
This
exemption falls under Section 54GB. It applies when the MSME
utilises capital gains from the sale of a long-term asset to purchase
equity shares in a qualifying start-up.
11. Increased Cost of Acquisition of Qualifying
Asset
Assets that need some time to prepare are
classified as “Qualifying Assets”. The cost of acquisition increases
through loan capitalisation used for purchasing these assets.
Because of the possible reduction of capital gains under the Income
Tax Act of 1961, MSMEs are provided benefits to avail several tax schemes.
12. Relief for Carry Forward and Set Off of Losses for
Start-ups
In the budget announced in 2023, Section 79
of the Income Tax Act was amended to extend the period for carrying
forward loss amount on changes in shareholding to 10 years from the
date of incorporation. This thereby provides a relief to
start-ups.
If all owners of business continue maintaining their
ownership of shares, the minimum of 51% criteria is relaxed and is
deducted from the carried forward loss amount for start-ups. This
adjustment has been implemented and taken into effect on April 1, 2023.
13. Extension of Incorporation Period for Start-ups
for Tax Exemption
To let start-ups avail tax
benefits, the incorporation period for start-ups is extended by
one year more. This is applicable for start-ups incorporated
before April 1, 2023.
14. Simplifying Amortisation Deduction Claims for
Preliminary Expenses
In the 2023 budget
announcement, Section 79 of the Income Tax Act underwent an
amendment, extending the duration for carrying forward loss amounts
due to changes in shareholding to 10 years from the date of
incorporation. This adjustment provides relief to start-ups.
15. Promotion of Timely Payments to MSMEs through
Income Tax Amendment
To incentivise prompt payments,
the new budget has expanded the scope of Section 43B(h) of the
Income Tax Act, 1961 to encompass all payments made to MSMEs. Upon
completion of these payments, tax deductions can be claimed. This
will be applicable if the payment is made within the prescribed time
according to the MSME Development Act.
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Key Tax Incentives for MSMEs in 2024
In 2024, MSMEs can capitalise on several key tax incentives, including:
- Tax Credits: Government may provide tax credits for specific activities, such as hiring and training employees, investing in environmentally friendly technologies, or promoting rural development.
- Investment Allowances: Investment allowances provide deductions on capital expenditures, encouraging MSMEs to invest in modern and innovative technology and expand their operations.
- Tax Holidays: Tax holidays grant MSMEs temporary relief from certain taxes, often in specific regions or industries, to stimulate economic development in those areas.
How to Maximise MSME Tax Benefits?
To make the most of the tax benefits available in 2024, MSMEs should consider the following strategies:
- Consult Tax Experts: Seeking advice from tax professionals can help MSMEs navigate complex tax regulations, and identify, and leverage all available benefits.
- Maintain Accurate Records: To claim tax deductions and credits, proper record-keeping is crucial. MSMEs should maintain all financial records and financial documents well.
- Stay Informed: As an MSME owner, you must always stay informed and updated about the tax laws. The tax regulations can change frequently and dynamically. MSMEs should stay updated on tax-related developments to ensure they don't miss out on any new benefits.
- Strategic Planning: Developing a tax-efficient business strategy can help MSMEs optimise their financial position. This may involve structuring operations in a way that maximises tax advantages.
To Conclude
Leveraging tax benefits can significantly impact the financial health, promote growth, and enhance the overall competitiveness of MSMEs. To harness these benefits effectively, MSMEs should remain informed, consult tax experts, maintain accurate records, and adopt strategic financial planning. By doing so, they can navigate the evolving tax landscape and continue contributing to the nation’s economic prosperity.
