Ease of Doing Business for MSMEs: Considering the fact that we majorly depend on MSMEs for employment, exports, and GDP contribution, the finance ministry is striving to facilitate their exponential growth and expansion. However, there are could be some challenges because of the taxation system.
- By Lionel Charles
Ease of Doing Business for MSMEs: The finance ministry of India has been trying to take some good steps in taxation that can facilitate the growth of MSMEs in India. The impact of the taxation system on MSMEs is twin layered- through the corporate taxation system and the GST. The budget 2020-21 announced on February 1, 2020, had a major focus on accelerating the growth of the MSMEs. The most significant change that impacted the whole idea of small and medium enterprises in recent times was the change in its definition. Earlier, the entities with investment up to Rs 10 crore were medium enterprises, for services the limit was 5 crore. However, now MSMEs are enterprises with investment up to Rs 20 crore and turnover less than Rs 100 crore. This has expanded the overall base, thereby, allowing a larger number of entities to have access to the taxation benefits available to the MSMEs. Some ways in which the current taxation system is expected to boost MSMEs are:
- Reduction of corporate tax rate: To incentivize investment in small and medium industries, the corporate tax for new companies in the manufacturing sector has been reduced to 15 per cent. For existing companies, the tax was reduced to 22 per cent making them one of the most enticing investment options and widening the funding funnel for MSMEs.
- Relief from tax audit: Earlier an enterprise was required to go through tax audit when the turnover crossed Rs 1 crore. This limit has now been pushed to Rs 5 Crore provided cash transactions do not exceed 5 per cent of total transactions. This has made tax compliance simpler for a wider number of MSMEs thereby allowing them to focus on growth.
- Goods and Service Tax: Several changes have been made in the indirect tax system to improve compliance. Simplification of GST returns, Aadhaar-based verification of taxpayers, electronic invoicing to facilitate compliance, etc. have made GST compliance multifold easier for MSMEs.
- Tax holiday expansion for start-ups: Startups having turnover up to Rs 25 crores had the tax benefit of getting 100 per cent of profits as a deduction for three consecutive years. This has gone through a major change. The limit of Rs 25 crore has been raised to Rs 100 crore making it available to some bigger startups too. Moreover, the benefit has been extended to be allowed for three out of the first 10 years instead of the first seven years. This shreds off the tax burden for several new startups and pushing them to stay longer and run faster in the race.
Considering the fact that we majorly depend on MSMEs for employment, exports, and GDP contribution, the finance ministry is striving to facilitate their exponential growth and expansion. However, there are could be some challenges being faced by MSMEs because of the Indian taxation system. Most of it is being carefully monitored by the ministry, evaluated, and being responded to, through the financial policies and legal amendments.
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Lionel Charles is the CEO of IndiaFilings. Views expressed are the author’s own.