What are Tax Benefits for MSME?

Posted on Wednesday, July 26th, 2023 | By IndusInd Bank

Micro, Small, and Medium Enterprises (MSME) play a crucial role in the Indian economy, contributing significantly to manufacturing output and export earnings. To support and promote the growth of the MSME sector, the Indian government provides various tax benefits. These tax incentives aim to reduce the tax burden on MSME, encourage entrepreneurship, and foster economic development. In this article, we will explore the various tax benefits that MSMEs can avail. 

Concessional Tax Rate: 

One of the significant tax benefits available to MSMEs in India is the concessional tax rate. Under Section 115BA of the Income Tax Act, 1961, certain domestic manufacturing companies, including MSME, are eligible for a reduced tax rate of 25% instead of the standard rate of 30%. To qualify for this concessional tax rate, the company must have a turnover of up to ₹400 crore and be set up and registered on or after March 1, 2016. However, companies availing this benefit are not allowed to claim specified deductions, set-offs, or carry-forwards. 

Additionally, MSMEs can also opt for a tax rate of 22% under Section 115BAA by fulfilling certain conditions. This reduced tax rate allows domestic companies, including MSMEs, to calculate their total income without considering various deductions, depreciation, and set-offs. Furthermore, companies availing this benefit are exempted from the payment of the maximum alternate tax under Section 115JB. 

New manufacturing domestic companies have the option to choose a 15% tax rate under Section 115BAB, provided they meet specific conditions. This section includes all the conditions under Section 115BAA and further requires the company to be set up and registered on or after October 1, 2019. It also mandates that the company cannot claim deductions under Section 80-ID and cannot be engaged in any other businesses. 

Presumptive Tax Scheme: 

MSMEs can benefit from various presumptive tax schemes, which allow them to reduce their tax liability. These schemes are available subject to specific conditions. For example: 

1. Section 44AD: Eligible businesses with a total turnover or gross receipts of ₹2 crore or less can opt for this scheme. It provides for a presumptive taxation system where the income is calculated as a percentage of the total turnover, and no detailed accounting is required. 

2. Section 44ADA: This scheme is available for professionals, such as doctors, lawyers, architects, etc., whose total gross receipts are ₹50 lakh or less. Similar to Section 44AD, it offers a presumptive taxation system for professionals. 

3. Section 44AE: Good carriage businesses can choose this scheme. It provides a presumptive tax calculation based on the number of vehicles owned and utilized for business purposes.  

Conclusion: 

The Indian government recognizes the vital role played by MSMEs in the country’s economy and supports their growth through various tax benefits. By taking advantage of the concessional tax rates, presumptive tax schemes, and other incentives provided by the government, MSMEs can optimize their tax planning and reduce their tax burden.  

Apart from tax planning, MSMEs also need to focus on how they manage their business finances to stay afloat. IndusInd Bank understands this and offers specialized current account solutions that help streamline your business operations, including tax-related transactions. 

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Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision.  IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.