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Tax Benefits of MSME in 2024
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.
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.
Also Read - Latest MSME Classification Explained: Criteria, Structure, Features
In 2024, MSMEs can capitalise on several key tax incentives, including:
To make the most of the tax benefits available in 2024, MSMEs should consider the following strategies:
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.
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