“Budget 2024-2025 Key Tax Law Changes Impacting Small Businesses”

Abstract

The Union Budget 2024-25, presented as an interim budget by Finance Minister Nirmala Sitharaman on February 1, 2024, was widely anticipated for its policy directions in the lead-up to the general elections. Contrary to expectations of sweeping reforms, the government adopted a philosophy of continuity and consolidation, refraining from major changes to the direct tax regime. For the small business sector, often described as the backbone of the Indian economy, this budget was notable for its stability and lack of disruptive amendments. This article provides a meticulous analysis of the key tax law changes and reaffirmed policies that impact Micro, Small, and Medium Enterprises (MSMEs). It delves into the extension of beneficial tax regimes, the clarification of outstanding issues like Section 43B(h), the implications of persistently high TDS/TCS rates, and the continued focus on digital compliance and manufacturing incentives. While no new significant concessions were announced, the budget reinforces the existing framework designed to ease compliance, improve cash flow, and encourage formalization and growth for small businesses. This analysis serves as a essential guide for small business owners, tax professionals, and stakeholders to navigate the unchanged yet crucial tax landscape for the fiscal year 2024-25.

Article: Budget 2024-2025 Key Tax Law Changes Impacting Small Businesses

Introduction

The Micro, Small, and Medium Enterprise (MSME) sector in India is a critical engine of economic growth, contributing approximately 30% to the nation's GDP and employing over 11 crore people. It is a sector characterized by its dynamism but also its vulnerability to regulatory changes and economic shifts. Therefore, the Union Budget is perennially scrutinized for measures that can either fuel or hinder its progress.

The Interim Budget for 2024-25, presented by Finance Minister Nirmala Sitharaman, was crafted against a backdrop of robust economic growth yet global uncertainties. In her speech, the FM explicitly stated, “...in keeping with the convention, I do not propose to make any change relating to taxation and propose to retain the same tax rates for direct and indirect taxes including import duties.” This announcement set the tone for a budget of stability rather than surprise.

For small businesses, this stability is a double-edged sword. On one hand, it provides a predictable regulatory environment, allowing for confident long-term planning without the fear of sudden fiscal shocks. On the other hand, the sector, still recovering from the pandemic's aftershocks and grappling with inflationary pressures, had hopes for specific relief measures, particularly in the areas of tax simplification, reduced rates, and easier compliance.

Despite the status quo on tax rates, the budget and the accompanying Finance Bill contain crucial reaffirmations, extensions of deadlines, and clarifications on previous amendments that have significant implications for small businesses. Understanding these nuances is paramount for effective financial planning and compliance in the forthcoming fiscal year.

This article breaks down these key aspects into detailed sections, providing a holistic view of the tax landscape for MSMEs in 2024-25.

Section 1: The Reaffirmation of Beneficial Tax Regimes

One of the most significant takeaways for small businesses is the government's commitment to the existing beneficial tax structures, namely the presumptive taxation schemes under Sections 44AD and 44ADA, and the new tax regime under Section 115BAC.

1.1. Presumptive Taxation Schemes (Sections 44AD, 44ADA, and 44AE)

Presumptive taxation is designed to simplify compliance for small taxpayers by eliminating the need to maintain detailed books of account and get them audited, provided they declare income at a prescribed rate.

• Section 44AD: For Eligible Businesses: This section applies to businesses with a turnover not exceeding ₹2 crore. Eligible businesses can declare a presumptive income at 8% (6% for digital receipts) of their total turnover/gross receipts.

✓ Budget Impact: The threshold limit of ₹2 crore remains unchanged. This continues to be a major boon for countless small merchants, retailers, and manufacturers. By opting for this scheme, they avoid the complexity and cost of a tax audit (subject to conditions), freeing up valuable resources to focus on their core operations.

✓ Strategic Consideration: Businesses with profit margins significantly higher than 8% may find this scheme unattractive as it leads to a higher tax outlay. They must carefully evaluate the cost of compliance (audit, accountant fees) versus the tax saved by declaring actual lower profits.

• Section 44ADA: For Specified Professionals: This section is for resident professionals (like lawyers, doctors, architects, engineers, etc.) whose gross receipts do not exceed ₹50 lakh. They can declare a presumptive income at 50% of their total gross receipts.

✓ Budget Impact: The retention of this scheme is vital for individual practitioners and small firms. It acknowledges the high cost-of-service model for professionals and allows them to declare 50% of receipts as income, simplifying their tax calculation immensely.

• Section 44AE: For Goods Carriage Operators: For businesses owning not more than 10 goods vehicles, this scheme allows declaring presumptive income of ₹1,000 per ton of gross vehicle weight (or unladen weight) per month (or a higher amount if actually earned).

✓ Budget Impact: No changes were proposed, providing continuity for small transport operators.

1.2. The New Tax Regime as the Default (Section 115BAC)

The new tax regime, offering lower tax rates but without most deductions and exemptions (e.g., under Section 80C, 80D, HRA, etc.), was introduced earlier and was made the default regime from FY 2023-24 onwards.

• Budget Impact: The budget reaffirms that the new tax regime is here to stay. For small businesses (proprietorships, partners in firms, etc.), this has a direct impact on how they plan their personal taxation.

✓ Tax Rates: The slab rates under the new regime are notably lower. For instance, income between ₹3-6 lakh is taxed at 5%, ₹6-9 lakh at 10%, ₹9-12 lakh at 15%, ₹12-15 lakh at 20%, and above ₹15 lakh at 30%. These rates are significantly lower than the old regime slabs.

✓ The Trade-off: The catch is the forfeiture of deductions. A small business owner who traditionally invested in tax-saving instruments (PPF, ELSS, etc.) or claimed deductions on home loan interest (Section 24) and HRA must now run a calculation to see which regime is more beneficial.

✓ Implication for MSMEs: For many small business owners with relatively straightforward finances and lower claims for deductions, the new regime could result in substantial tax savings. The budget's silence implies that businesses must actively choose the old regime by filing the appropriate form if it is more beneficial for them; otherwise, they will be assessed under the new regime by default.

Section 2: Clarification and Extension on Critical MSME Payments – Section 43B(h)

This is arguably the most impactful clarification provided in the budget, addressing a widespread concern among small and large businesses alike.

2.1. The Original Amendment (Budget 2023)

A new clause (h) was inserted in Section 43B of the Income Tax Act, 1961, via the Finance Act 2023. This clause stated that any deduction for expenses claimed by a business (buyer) for purchases from an MSME registered under the MSMED Act, 2006, would be allowed only in the year in which the payment was actually made to the MSME supplier. The deduction would not be allowed on an accrual basis if the payment was outstanding beyond the time limit specified in the MSMED Act.

The MSMED Act mandates that:

Payments must be made within 15 days from the date of acceptance of goods/services, if there is a written agreement.

✓ In the absence of an agreement, payments must be made within 45 days.

✓ If a buyer failed to make the payment within this period, they would lose the deduction for that expense in that financial year. They could only claim the deduction in the year they actually made the payment.

2.2. The Problem and the Budget 2024 Solution

The amendment, effective from April 1, 2024 (FY 2024-25), caused significant anxiety. Industries with longer credit cycles (e.g., manufacturing, infrastructure) argued that a 45-day credit period was impractical. There were fears of widespread disallowances, increased working capital pressure on buyers, and potential friction in business relationships.

The Budget 2024 provided a crucial clarification via an Explanation to Section 43B(h). It states that the disallowance shall not apply to payments which are not actually paid before the due date of the taxpayer's return filing but only if:

1. The payment was made within the time limits specified in the MSMED Act (i.e., 15/45 days); OR

2. The payment was made after the specified time limit but the written agreement between the buyer and the MSME supplier provides for a credit period longer than 45 days.

2.3. Detailed Implications for Small Businesses

• For MSME Suppliers (Sellers): This is a protective measure. It ensures that if they are registered under the MSMED Act, they are legally empowered to receive payments on time. Delayed payments from buyers will now directly impact the buyers' tax liabilities, acting as a strong deterrent against payment delays. This improves the cash flow predictability for MSME suppliers.

• For Buyers of MSME Goods/Services (who could be other businesses or large corporates):

✓ Formal Agreements are Key: The most important outcome is the necessity of a written agreement. If a buyer wishes to have a credit period longer than 45 days, it must be explicitly documented in a written contract with the MSME supplier. Without this, the 45-day limit is rigid, and failure to pay within 45 days will lead to a tax disallowance.

✓ Cash Flow Management: Buyers must rigorously manage their payables to MSMEs. Failure to do so will not only strain business relationships but also lead to a higher tax burden, as the expense will be added back to their taxable income.

✓ Verification of MSME Registration: Buyers must now implement processes to verify the registration status of their suppliers under the MSMED Act (via Udyam Certificate) to determine if Section 43B(h) applies to their transactions.

This amendment brings tax law in sync with the MSMED Act's objective of curbing the menace of delayed payments to MSMEs.

Section 3: Tax Deduction and Collection at Source (TDS/TCS)

While no new TDS rates were introduced, the budget maintains the existing structure, which small businesses must diligently comply with.

3.1. High TDS Rates for Non-Filers (Section 206AB)

This existing provision, introduced earlier, remains a critical compliance point. If a recipient (deducted) of a payment has:

a) Not filed their Income Tax Returns (ITRs) for the two previous years immediately before the year in which TDS is to be deducted, and

b) The due date for filing the ITR has passed, and

c) The total TDS deducted in their case was ₹50,000 or more in each of those two previous years,

Then the TDS rate will be twice the rate specified in the relevant provision or 5%, whichever is higher.

✓ Impact: This is a punitive measure to force compliance. Small businesses must ensure they file their ITRs on time every year to avoid being subjected to a higher rate of TDS on their receipts (e.g., professional fees, commission, etc.), which severely impacts their cash flow.

3.2. TDS on Payments to MSMEs (Section 194Q)

While not new, Section 194Q requires buyers whose turnover exceeds ₹10 crore to deduct TDS at 0.1% on purchases of goods from any supplier (including MSMEs) where the value of such purchase exceeds ₹50 lakh in a year. Small businesses supplying to large entities must factor this into their invoicing and cash flow calculations.

3.3. TDS on Cash Withdrawals (Section 194N)

To promote digital transactions, TDS is levied on cash withdrawals exceeding certain limits:

✓ ₹20 lakh during the year: No TDS (if ITR filed for last 3 years).

✓ Exceeding ₹1 crore: TDS at 2% on the amount exceeding ₹1 crore.

✓ For those who have not filed ITR for any of the three previous years: TDS at 2% on withdrawals exceeding ₹20 lakh and 5% on withdrawals exceeding ₹1 crore.

This encourages small businesses to operate through banking channels and avoid large cash transactions.

Section 4: Digital Compliance and Litigation Management

The budget continues the government's unwavering push towards digitization of tax processes, reducing human interface and increasing efficiency.

4.1. Expansion of the e-Appeal Scheme

The Faceless Appeal scheme has been made permanent and given statutory backing. Now, most appeals to the Commissioner (Appeals) will be handled electronically through automated allocation and anonymized processes.

✓ Benefit for MSMEs: This reduces the time, cost, and potential harassment associated with physical hearings. A small business owner from a remote town can now effectively pursue an appeal without traveling to a major city.

4.2. Withdrawal of Outstanding Direct Tax Demands

In a major relief measure aimed at clearing legacy clutter, the FM announced the withdrawal of outstanding direct tax demands up to ₹25,000 for the period up to FY 2009-10 and up to ₹10,000 for FY 2010-11 to FY 2014-15.

✓ Impact: This measure will close numerous petty, long-pending disputes that were clogging the system and causing anxiety for many small taxpayers. It is a clean-up exercise that provides genuine relief.

4.3. Strengthening of the GST Network

While not a direct tax, the emphasis on strengthening the GST infrastructure indirectly benefits small businesses by making compliance smoother, reducing technical glitches, and improving the efficiency of refund processing.

Section 5: Indirect Tax and Custom Duty Changes

The budget proposed no changes to GST rates, as that is the prerogative of the GST Council. However, some custom duty changes have implications for specific MSME sectors.

5.1. Custom Duty Exemptions on Certain Inputs

The budget proposed exempting custom duties on specific inputs like parts of mobile phones, components used in the manufacture of electronic goods, and certain chemicals. MSMEs operating in these manufacturing sectors (electronics, mobile phone assembly, pharmaceuticals) will benefit from lower input costs, enhancing their competitiveness.

5.2. National Logistics Policy

The continued focus on improving logistics through schemes like PM Gati Shakti will, over time, reduce the cost and time of transportation for MSMEs, making their goods more competitive in both domestic and international markets.

Section 6: The Missed Opportunities and The Road Ahead

While the budget provides stability, several expectations of the MSME sector remained unaddressed.

✓ Simplification of GST: The sector hoped for further simplification of GST slabs and processes, especially for small taxpayers.

✓ Enhanced Credit Access: While schemes like the CGTMSE exist, there was a hope for a more direct intervention to ease the cost and availability of formal credit for MSMEs.

✓ Tax Audit Threshold: Many industry bodies had recommended increasing the tax audit threshold under Section 44AB from the current ₹10 crore (for 95% digital transactions) to a higher limit to reduce the compliance burden.

✓ Sector-Specific Incentives: Specific sectors hit hard by global events (e.g., handicrafts, textiles, exports) hoped for targeted stimulus packages.

The road ahead suggests that the government's strategy for MSMEs is built on three pillars: formalization (through Udyam, GST, and digital payments), ease of compliance (through presumptive schemes and faceless assessments), and protection (through measures like Section 43B(h)). The full budget, expected in July 2024 after the general elections, might see more targeted interventions.

Conclusion

The Interim Budget 2024-25 may not have been a headline-grabber for small businesses, but its value lies in its predictability and reinforcing of positive existing frameworks. The clarification on Section 43B(h) is a masterstroke that balances the need to protect MSMEs from delayed payments while providing a pragmatic solution for industry credit practices. The reaffirmation of presumptive tax schemes and the new tax regime offers continuity and planning clarity.

For the small business owner, the message is clear: the focus for FY 2024-25 should be on rigorous compliance, leveraging digital tools, formalizing business agreements, and meticulous financial planning. Adapting to the prevailing tax environment, characterized by digital scrutiny and rule-based incentives, is no longer an option but a prerequisite for sustainable growth. By understanding and implementing the provisions reaffirmed in this budget, small businesses can not only ensure compliance but also optimize their tax outgo and strengthen their financial foundation for the future.

Here are some questions and answers on the topic:

1. What was the overall approach of the Budget 2024-25 towards taxation for small businesses, and why is it significant?

The overall approach of the Budget 2024-25 towards taxation was one of stability and continuity, with no changes proposed to direct or indirect tax rates. This is significant for small businesses as it provides a predictable and non-disruptive regulatory environment, allowing them to plan their finances and operations for the upcoming year with greater confidence and without the fear of sudden fiscal shocks or needing to adapt to new complex rules.

2. How does the clarification on Section 43B(h) regarding MSME payments benefit both small business suppliers and their buyers?

The clarification on Section 43B(h) benefits MSME suppliers by creating a powerful financial deterrent for buyers who delay payments, as those buyers will lose their tax deduction for the expense, thereby encouraging timely payments and improving the cash flow of small businesses. For buyers, it provides a clear pathway to avoid this tax disallowance by formalizing longer credit cycles through a written agreement with the MSME supplier, thus protecting their own tax position while maintaining functional business relationships.

3. Why is the continuation of the presumptive taxation scheme under Sections 44AD and 44ADA a crucial measure for small businesses and professionals?

The continuation of the presumptive taxation scheme is crucial because it significantly reduces the compliance burden for eligible small businesses and professionals by eliminating the mandatory requirement to maintain detailed books of account and undergo a tax audit, provided they declare income at a prescribed rate of their turnover, thereby saving them time, accounting costs, and administrative complexity.

4. What is the implication of the new tax regime under Section 115BAC being the default option for small business owners and individual professionals?

The implication of the new tax regime being the default option is that small business owners and professionals will now be assessed under its lower tax rates automatically unless they consciously opt for the old regime, requiring them to perform a calculated comparison to determine which regime is more beneficial for them based on their ability to forgo numerous deductions and exemptions like those under Sections 80C and 80D.

5. Beyond new announcements, what existing TDS provision should small businesses be most cautious about to protect their cash flow?

Beyond new announcements, small businesses should be most cautious about the existing provision of Section 206AB, which imposes a higher TDS rate on payments made to them if they have not filed their income tax returns for the two previous financial years, as this can severely impact their immediate cash flow by reducing the net amount received from clients and customers.

Disclaimer: The content shared in this blog is intended solely for general informational and educational purposes. It provides only a basic understanding of the subject and should not be considered as professional legal advice. For specific guidance or in-depth legal assistance, readers are strongly advised to consult a qualified legal professional.