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How Small Businesses Pay Taxes?

Sukanya Mukherjee -

How Much Do Small Businesses Pay In Taxes And More.

  1. Do small businesses have to pay taxes?
  2. The answer is definitely yes.
  3. It is mandatory for every entity to pay taxes, whether it’s a small or a big business.
  4. Whenever an entity earns above a specified threshold limit, it has to pay taxes based on the applicable tax rates.
  5. This sum can be a considerable amount. Businessmen and entrepreneurs need to be aware of the tax computation process as well.
  6. They always seek deductions and exemptions to reduce their tax liability.
  7. They need to know on what basis they are being taxed.
  8. Some information regarding these aspects is covered below.

Taxes to Be Paid By Small Businesses

  • Income tax (personal)
  • Income tax (corporate)- Minimum Alternate Tax (MAT), Fringe Benefits Tax, Dividend Distribution Tax (DDT)
  • Payroll tax
  • Custom duty
  • Excise duty
  • Capital Gains tax
  • Goods & Service Tax (GST)

1. Goods & Service Tax

  • It’s easy and simple for small businesses to get registered under GST with the help of online professional services.
  • They help in invoices and filing returns as well.
  • To be eligible for getting a GST number, a business should belong to either of the following:
  1. Manufacturing sector along with an annual turnover of 40 lakh rupees or more.
  2. Service sector along with an annual turnover of 20 lakh rupees or more.
  3. North-eastern region and hilly states along with an annual turnover of 10 lakh rupees or more.
  • GST has become a validity and authentication symbol.
  • Small businessmen have many advantages to reap under the GST scheme.
  • A couple of them are less compliance burden and establishing an identity among various groups like clients, financial institutions, government, etc.
  1. As per the Income Tax Act, you can run a small business in India either as a proprietorship concern, small company, or partnership firm.
  2. Proprietorship is a business run by an individual.
  3. A partnership firm is formed and regulated as per the Indian Partnership Act 1932.
  4. It can also be a Limited Liability Partnership (LLP), which is established through the Ministry of Corporate Affairs (MCA).
  5. A company is established as per the provisions of the Companies Act.

3. Taxation For LLP

  • A Limited Liability Partnership is covered under the flat tax rate of 30% on the total income.
  • When the total income is more than one crore rupees, it is also liable to pay a surcharge at the rate of 10%.
  • Health and education cess is applied to the total tax.

4. Corporate Tax for Companies

  1. Small businesses that are run in the form of companies have to pay tax at the rate of 25% if the turnover is less than or equal to 250 crore rupees in a year.
  2. However, the taxation rate is 30% in the case of companies having a total turnover of more than 250 crore rupees.

5. Taxation For Proprietors

  • Taxation for proprietors is different from taxation for an LLP and a company.
  • The income tax slab rates for proprietors are the same as those for individuals.
  • These are as follows:

Taxable Total Income                        Tax Rate

Less than or equal to RS. 250,000     Nil

RS. 250,000 - RS. 500,000               5%

RS. 5,00,000 - RS. 10,00,000             20%

More than RS. 10,00,000                   30%

  • In addition to this, they are liable to pay the applicable surcharge and cess.
  • To simplify the process for small businesses and to avoid these complex calculations, the Government of India has come up with a tax scheme based on a presumptive basis.
  • This is a scheme for small businesses with low annual volume and turnover.
  • Small businesses generally choose to pay taxes under this simplified tax regime.
  • Under this scheme, the determination of total income for that year is presumed to be a fixed percentage of business turnover during that year.
  • This is provided under section 44AD of the Income Tax Act.

Deductions For Small Businesses Under The Income Tax Act

  1. Convenience expenses such as vehicles and phones extensively used for business purposes are deductible as a business expense.
  2. Preliminary expenses incurred before the entity’s establishment are allowed as a deduction under section 35D of the act.
  3. Regular expenses such as electricity, internet, rent, etc., are deductible as business expenses.
  4. Depreciation is allowed as an expense and can be deducted for all capital expenses to reduce your tax liability.
  5. Medical insurance premium up to RS. 25000 is allowed as a deduction under section 80D of the Income Tax Act.
  6. It covers your spouse, children, and parents.
  7. Donation to political parties, charities, and funds also reduces your tax liability.
  8. You can avail of a deduction under section 80C up to 1,50,000 rupees for a housing loan.
  9. Many other such deductions and provisions covered under the Income Tax Act are beneficial for small businessmen and traders.
  10. However, to make tax compliance a hassle-free process, many small traders and businessmen opt for taxation on a presumptive basis.

Taxation At A Presumptive Basis For Small Businesses—Section 44AD

  1. The main aim of this section under the Income Tax Act is to significantly reduce the tax compliance burden for small businessmen.
  2. They get rid of performing complex calculations.
  3. Such businesses are not required to maintain the books of accounts or get them audited by a CA.
  • Eligible Assessee- An eligible assessee under this section can only be an individual, a Hindu Undivided Family (HUF), or a partnership firm that is an Indian resident. A Limited Liability Partnership (LLP) is specifically not covered under this section.
  • Deduction- Assessee's covered under this section are not allowed any benefit or deduction under section 10A, 10AA, 10B, or 10BA. They cannot claim deduction under the provisions of Chapter VI-A under “Deductions in respect of certain incomes.”
  • Business - Assessee's having business in wholesale, manufacturing, trading, or retail are eligible and can opt for availing of this scheme. However, an eligible assessee engaged in any of the following businesses will not be covered under this section.

1.  An assessee having income from any profession as covered under section 44AA. A separate scheme is available under section 44ADA for such professionals.

2.  Any business related to an agency.

3.  An assessee earning income from any kind of brokerage or commission.

4.  A business like plying, hiring, and leasing goods carriages as referred to under section 44AE.

Presumptive Profit  

  • An eligible assessee with a business whose gross receipts during a previous year does not exceed 2 crore rupees is eligible for declaring their net profit as 8% of such gross receipts or turnover or a higher amount.
  • The net profit can be deemed 6% instead of 8% of the total turnover if such payments are received by bank draft, account payee cheque, or any other digital payment mode.
  • The Government of India has incentivised small businesses with this move to promote the concept of a digital and cashless economy.
  • An assessee can simply compute and pay tax without maintaining books of accounts.

Opting Out Of The Scheme

  • If an assessee decides to pay taxes under this scheme and opts out of the scheme in any year during the next 5 years, he shall not be permitted to opt for this scheme again in the further 5-year period, starting from the year in which he opts out.
  • In this case, the assessee has to maintain and get the books of accounts audited under section 44AB as prescribed by law.

Salary And Interest

  • Salary and interest paid to partners in case of a partnership firm shall not be deducted from net profit computed under this section.

Benefits of Paying Taxes on Presumptive Basis

1.  Instead of paying quarterly advance tax, you can pay all at once before 31st March.

2.  No need to maintain books of accounts.

3.  No need to get your books of accounts audited by a chartered accountant.

4.  You need to pay taxes only on a part of your net income.

5.  You have to pay taxes only on 6% of your net income if receipts are in electronic or digital form.

Summing It Up

  • Starting a business is no easy task.
  • Along with other aspects, you have to take care of taxation as well.
  • With taxation schemes like the GST composition scheme and presumptive scheme for income tax, you do not have to worry about deductions, claims, and the overall computation.
  • It becomes a hassle-free process and makes it easier for assesses to meet the tax compliance needs.

Also Read:

1) How to Prepare Your Business for Tax Season?
2) How To Reduce Your Taxable Income?
3) What Kind of Benefits do We Get by Paying Taxes in India?
4) What Is Lower Tax Deduction Certificate?
5) How are the mutual funds taxed in India?