To make the Income Tax Act more beneficial to professionals and small enterprises, the government changed a number of its sections. The Income-tax Act still requires several sections to be updated, though, in order to keep up with modern times. In Budget 2023, the government should take the following into account while rationalising some income tax rules for professionals and small businesses.
One of the world’s largest startup ecosystems, India is anticipated to have rapid growth in the years to come. Considering its durability and ongoing growth pace despite the global slowdown and recessionary constraints, India is also emerging as one of the most popular investment locations.
According to data from the Ministry of Micro, Small, and Medium Enterprises (MSMEs), as of November 25, 2022, the Udyam Registration portal had registered 12,201,448 MSMEs, of which 11,735,117 (approximately) were microenterprises, followed by 426,864 (approximately) small enterprises and 39,467 (approximately) mid sized enterprises. Significantly, India has a sizable population of MSMEs, which are essential to economic expansion.
So, the government should take into account rationalising certain income tax provisions for small enterprises and professionals in Budget 2023 in order to further support small and medium businesses in India.
Also, MSMEs should register their companies on the new udyam registration portal under the Ministry of MSMEs. Since this msme portal links the gst and income tax portals together. Every micro, small, and medium business must use the Udyam Registration Portal, which is maintained by the Ministry of Micro, Small, and Medium Businesses. The Udyam Registration Portal would automatically collect PAN and GST-related information on firm investment and revenue.
1. Extending the advantage to LLPs and raising the threshold for presumed taxes –
The Income Tax Act of 1961 contains a specific provision known as Section 44AD that allows for the presumptive computation of company earnings and gains. According to the current rules, a qualified taxpayer operating a qualified business (as defined in the section) may treat 8% of their gross receipts, sales, or total turnover as business income. However, if the gross receipts or total turnover for the relevant financial year are received through one of the specified modes (i.e., specified modes other than cash, bearer checks, etc.), such as an account payee cheque, account payee bank draught, ECS, or through such another electronic mode, then such presumptive rate would be further reduced to 6% in respect of that financial year.
In Budget 2016, the threshold for presumed taxation was raised from Rs. 1 crore to Rs. 2 crore. Thus, it is suggested that the ceiling may be raised to Rs 5 crore to account for increases in economic activity and the volume of business since then.
Furthermore, the aforementioned section clearly states that Limited Liability Partnerships (LLPs) are not permitted to benefit from this part. We believe that many small firms in India are set up as LLPs, which unnecessarily prevents them from taking advantage of presumed tax rates. Therefore, it is suggested that LLPs may also be eligible for section 44AD benefits where sales do not exceed the predetermined threshold.
2. Justifying some professionals-specific elements of Section 44ADA
For professionals working in the fields of accounting, law, medicine, engineering, architecture, technical consulting, interior design, or any other profession as specified by the CBDT, Section 44ADA contains presumptive tax provisions. Additionally, the advantage under this clause is only available to professionals whose total gross earnings or total sales in a given financial year do not exceed Rs 50 lakh. Professionals who qualify can count 50% of the total gross revenue as income.
It is advised to adequately raise the threshold limit of Rs. 50 lakh to at least Rs. 1 crore in order to support and assist small and medium professions. This will make it easier to conduct business and help more professionals fall under the purview of this section.
Additionally, because professional services are becoming more expensive, considering 50% of gross sales as income may ultimately work against professionals who own small businesses. The main goal of this provision may be defeated if many experts choose not to participate in this programme due to this high rate.
As a result, it is also recommended that the presumed rate of income at 50% of the entire gross revenues be appropriately decreased, say to 30%.
3. To address the Form 26AS issue of partial TDS credit not being granted.
In circumstances where the revenue presented in the ITR form (as per books) is lower than that reflecting in Form 26AS, small firms and professionals are not allowed the entire TDS credit appearing in Form 26AS according to the current income tax return (ITR) processing system.
Because the deductor and the taxpayer use different accounting methods, receipts reported on Form 26AS may relate to income that was already subject to tax in prior fiscal years or they may be receipts of advance income reported on Form 26AS for the current fiscal year.
Due to this, the taxpayer either does not receive TDS credit in the financial year prior to income being offered (as a result of TDS credit not appearing on Form 26AS for that financial year) or in the year following income being offered (as a result of the difference between the income reported on the books and the gross receipts reported on Form 26AS), resulting in the taxpayer forfeiting TDS credit.
4. Justification of TDS rates for new and small companies
While the TDS rates in some other sections (Section 194J – applicable for Professional Services and Section 194-I – applicable for TDS on rent of land and building) may go as high as 10%, certain sections provide a nominal TDS rate (for example, Section 194C – applicable for contracts imposes a TDS rate @ 1%/2% depending upon the nature of tax deductee).
By imposing restrictions on their liquidity—a crucial component for the smooth operation of the business operations—small enterprises and start-ups are subjected to withholding requirements, which leads to problems with working capital. Therefore, it is advised that section 194J rationalise the TDS rates and lower them from 10% to 5%.
Conclusion
Small enterprises in India are looking for changes in the income tax structure that can benefit their business operations. They have highlighted several key areas where they want the government to take action, such as simplifying the tax filing process, reducing tax rates, and introducing incentives for businesses that invest in R&D and innovation.
These changes are crucial for small enterprises to thrive and compete with larger businesses in the Indian market. By reducing the burden of taxation and promoting investment in R&D, small enterprises can expand their operations, create more jobs, and contribute to the growth of the Indian economy.
It is important for the government to take into consideration the concerns of small enterprises and implement measures that can improve their financial viability. The government must work towards creating a more conducive tax environment for small enterprises, which in turn can lead to their overall development and progress.
