Taxation is an inevitable task for every business. The famous words of Benjamin Franklin, the founding father of the United States, that there is nothing in the world that is as certain as death and taxes, highlight this point. New businesses have the burden of different types of costs. One of the top contributors to that is taxation. Tax planning is the strategy to bring down the tax liabilities.
While taxation is the charges levied by the government on citizens and entities, tax planning is knowing how to effectively use the different exemptions, deductions, or other benefits on the tax front. So, the macro and microenvironment of the business contribute to efficient tax planning. Or in other words, it is all about knowing how the financials work best for a firm.
The prerequisite for effective tax planning is to familiarise the tax regulations, including the latest changes. It is not everyone’s cup of tea, or rather, it requires a certain level of expertise. The cost to hire the experts is an added strain on new businesses. Outsourcing the experts is one of the viable options for them. Some of the tax planning pointers or tips are mentioned below in detail.
Tax planning for new business
Tax planning is beneficial to any business in multiple ways. Some of the benefits are:
Reduce tax liabilities
Though the primary motive of tax planning is well-ordered financial management, it is a bonus when the tax liabilities reduce. It reveals the exemptions or subsidies given by the tax authorities for different reasons like the nature or form of business.
Once the tax liabilities decrease, litigations about the tax payments also decrease. Tax litigations are hassles businesses try to avoid for obvious reasons. It increases the cost and adversely affects the total operational efficiency.
Tax planning opens up new channels of sensible investments for a business. It improves total financial stability in the long run.
Almost all aspect of business affects its productivity. Consider the example of bringing down the cost. Cost and profit are inversely proportional to each other. When the bottom-line increases, there are more avenues for investment, which positively affect productivity.
Tax planning is an expert’s forte, yet there are few pointers or tips for a new business to consider.
Know the location, nature, and form of business
There is tax exemption or subsidies for businesses set up in specific locations (like Special economic Zone or industrially backward states or districts, etc.). For example, for entrepreneurs or newly established firms that started functioning on or after 1 April 2006 and on or before 1 April 2021, in Special Economic Zones (SEZ), the following deduction is allowed as per Section 10AA:
- a) hundred percent of profits and gains for five consecutive assessment years
- b) fifty percent of profits and gains for a further five assessment years.
Tax deductions or exemptions are provided based on the nature of the business. Consider the example of tea, coffee, or rubber development accounts. The deductible amount allowed under section 33AB is on the lower of,
- a) A sum equal to forty percent of its profit and gains, or
- b) the aggregate of the sum deposited under this section.
Similarly, the different forms of business -sole proprietorship, partnership, LLP, one-person company (OPC)- also comes under tax planning.
Tax holiday for startups
Startups incorporated on or before 31 March 2023 are eligible for a tax holiday for three years, provided the annual turnover does not cross Rs 25 crore in any financial year. It will help boost the startup culture in India. The tax redemptions will help the startups in funding to achieve scalability.
Categorize the business expenses
The three categories of business expenses are preliminary, convenience, and regular. Section 35D of the Income Tax Act provides incentives for entrepreneurs on the capital to start a business. The eligibility criteria for initial expenses are
- a) expenses incurred on starting a business,
- b) expenses for expanding or starting a new unit.
The tax incentive is on not more than 5 percent of the cost. So, categorization allows availing all the tax incentives granted by the authorities.
Presumptive tax schemes
Section 44AD of the Income Tax Act covers the presumptive taxation for new businesses with a turnover of less than Rs 2 Crores. So, 8 percent of non-digital transactions and 6 percent of digital transactions come under the presumptive tax scheme. The tax incentives on digital transactions help in boosting them in new and small businesses.
Tax rebates on startups
There are multiple tax rebates and incentives for startups. If the criteria specified by the Department of Industrial Policy and Promotion (DIPP) are satisfied by startups, they are eligible for multiple tax deductions. Section 80-IAC of the Income Tax Act gives tax exemptions on profits. Section 56 of the Income Tax Act provides exemptions on investments.
It is common knowledge that a new business has multiple hurdles to face. Finance is the common thread between these different focal points. It is, indeed, the make or break of any new business. As seen earlier, tax planning contributes to sensible investment and efficient financial management. An affordable alternative is to outsource the taxation and tax planning so that the focus returns to the core areas of business.
Diligen prides on having a team of well-experienced tax experts to help clients with their taxation and tax planning needs.