“Tax Relief Options Available To Small Businesses”

Abstract

Small businesses are the backbone of every economy, providing employment opportunities and contributing significantly to national income. However, they often face financial challenges, especially with tax compliance and cash flow management. To support these businesses, governments across the world, including India, offer various tax relief options. These reliefs come in the form of deductions, exemptions, credits, rebates, and special schemes aimed at reducing the tax burden. This article provides a comprehensive understanding of the tax relief options available to small businesses, their eligibility, and their impact on long-term business sustainability.

Introduction

Starting and running a small business is not easy. Entrepreneurs often deal with limited capital, high competition, and strict regulatory compliances. One of the major areas of concern for small business owners is taxation. While paying taxes is a legal obligation, excessive tax burden can restrict growth and discourage investment. Recognizing these challenges, the government provides several tax relief measures to encourage small businesses, improve cash flow, and promote entrepreneurship.

This article explores the various tax relief options available to small businesses in India, explaining how these measures help reduce financial stress and enhance profitability.

Tax Relief Options Available to Small Businesses

1. Presumptive Taxation Scheme (Section 44AD, 44ADA, 44AE)

• Under this scheme, small businesses with turnover up to ₹3 crore (₹2 crore earlier) can opt for presumptive taxation.

• Instead of maintaining detailed books of accounts, they can declare profits at a prescribed rate (e.g., 8% of turnover for businesses, 6% for digital transactions).

• Professionals such as doctors, lawyers, and architects with receipts up to ₹75 lakhs can also avail this scheme under Section 44ADA.

• This reduces compliance burden and helps save costs on maintaining accounts and audits.

2. Tax Deductions for Start-ups (Section 80-IAC)

• Recognized start-ups can claim a 100% tax holiday for 3 consecutive years out of the first 10 years of incorporation.

• This is applicable to eligible businesses engaged in innovation, technology, or improvement of products and services.

• It provides significant breathing space for new businesses to reinvest profits into growth.

3. Lower Corporate Tax Rates for Small Companies

• Domestic companies with turnover up to ₹400 crores in the previous financial year are taxed at 25%, compared to higher rates for bigger companies.

• This reduced tax rate is a major relief for small and medium-sized enterprises (SMEs).

4. GST Composition Scheme

• Small businesses with turnover up to ₹1.5 crore can opt for the GST Composition Scheme.

• Instead of charging and collecting GST at standard rates, they pay tax at a much lower fixed rate (1% for traders, 5% for restaurants, 6% for service providers with turnover up to ₹50 lakhs).

• This reduces compliance, as businesses need to file fewer returns and maintain simplified records.

5. Deductions for Business Expenses

Small businesses can claim deductions for a wide range of legitimate expenses, such as:

• Rent, salaries, electricity, and office expenses.

• Depreciation on machinery and equipment.

• Marketing, advertising, and professional fees.

• Interest paid on business loans.

These deductions help in reducing taxable income, thereby lowering the overall tax liability.

6. Relief under Section 80JJAA (Employment Generation)

• Businesses that hire new employees can claim a deduction of 30% of additional employee cost for 3 assessment years.

• This encourages small businesses to expand their workforce while enjoying tax benefits.

7. Carry Forward and Set-Off of Losses

• Small businesses can carry forward losses (like business loss or depreciation) to future years and adjust them against future profits.

• This reduces future tax burden and provides financial relief during tough business cycles.

8. Incentives under Digital Payments

• Businesses that accept digital payments benefit from reduced presumptive tax rates (6% instead of 8%).

• This not only encourages digital transactions but also reduces tax liability for compliant businesses.

9. Tax Rebates for Proprietors (Section 87A)

• Small business owners operating as sole proprietors can claim rebates under Section 87A, if their total income does not exceed ₹7 lakh (as per latest Finance Act).

• This completely eliminates income tax liability for many small entrepreneurs.

10. MSME-Specific Reliefs

• The government provides additional relief measures for Micro, Small, and Medium Enterprises (MSMEs):

• Extended time limits for filing returns.

• Quicker processing of refunds.

• Special credit-linked subsidies and interest subventions.

• Priority sector lending benefits.

These measures indirectly help reduce financial and tax-related burdens.

What are Some Common Tax Deductions for Small Business Owners?

While there are various deductions and exemptions available to salaried employees, small business owners can also claim several deductions and exemptions from their overall income. Given below are 25 income tax deductions for small business owners.

Rent, Rates, Taxes, Repairs and Insurance for Building

Deduction with respect to the rates, taxes, rent, repairs, insurance, and land revenue for the office premises used for business. Rent of the building is deductible only if the assessee does not own the property.

Repairs and Insurance of Machinery, Plant and Furniture

You can deduct the expenses for current repairs and insurance on plant, machinery, and furniture used for business purposes, as long as they're not capital expenses.

Depreciation

To claim depreciation, certain conditions need to be met:

✓ The asset must be owned by the taxpayer.

✓ It must be used for business or professional purposes.

✓ The asset should have been used during the relevant tax year.

✓ Depreciation is applicable to both tangible and intangible assets.

If these conditions are fulfilled, depreciation can be claimed regardless of whether the taxpayer has already deducted it when calculating their total income.

Additional Depreciation

To claim additional depreciation, these conditions must be met:

✓ The taxpayer must be involved in manufacturing/production or power generation and distribution.

✓ New plant and machinery must be acquired and installed after March 31, 2005.

✓ The plant and machinery must meet eligibility criteria. Additional depreciation isn't applicable to certain assets like ships, aircraft, second-hand assets, assets used in office or residential settings, office appliances, and road transport vehicles. Additionally, assets that qualify for a 100% deduction in the first year under any provision of the Act are excluded.

✓ The amount of additional depreciation allowance is calculated at 20% of the actual cost of the new plant and machinery. However, if the asset is used for less than 180 days in the year of acquisition, the rate of additional depreciation is reduced to 10%, with the remaining 10% allowed as a deduction in the following year.

Expenditure of Scientific Research

✓ Revenue Expenditure: Costs incurred on scientific research, if related to the business, are deductible in the year they are expended. Pre-business commencement expenses on scientific research (within three years before starting the business) are also deductible in the year the business starts, subject to certification by the prescribed authority.

✓ Capital Expenditure: Capital expenses on scientific research, excluding land costs, are fully deductible in the year they are incurred. Pre-business commencement capital expenses on scientific research are deductible in the year the business begins. However, depreciation is not allowable in such cases.

✓ Contribution to Approved Entities: Contributions to approved research associations, universities, colleges, or other institutions are fully deductible at the actual contribution rate. This includes contributions for social science or statistical research, as well as those for

approved research programs in national labs, universities, IITs, or specified persons.

✓ In-House Research and Development (R&D): Expenditure on approved in-house R&D facilities is eligible for 100% deduction, provided certain conditions are met. The company must be engaged in biotechnology, manufacture, or production, excluding specified items. No deduction is allowed for land costs, but building costs can be claimed under capital expenditure rules.

Expenditure on Getting Right to Use Spectrum of Telecommunications Services

Capital expenditure paid by a taxpayer to acquire the right to use spectrum for telecommunication services through spectrum fees is deductible in equal installments over the duration of the spectrum's use. This deduction begins in the year of actual payment or the year the business commences, whichever is later, and continues until the spectrum is no longer in use. This deduction applies regardless of the financial year in which the liability for the expenditure was incurred, following the taxpayer's regular accounting method or as prescribed by regulations.

Deductions under section 36

The expenses given below are deductible under section 36 -

✓ Insurance premium

✓ Insurance premium on health on health of employees

✓ Commission or bonus to employees

✓ Interest on Borrowed Capital

✓ Discount on Zero Coupon Bonds

✓ Contribution towards approved gratuity fund

✓ Employer’s contribution to RPF-approved superannuation fund and notified pension scheme

✓ Employees contribution towards staff welfare schemes

✓ Bad debts

✓ Family planning expenditure

✓ STT

✓ Commodities transaction tax

✓ Marked to market loss

General Deduction

Section 37(1) serves as a residual provision for deductions. To qualify for deduction under this section, the following conditions must be met:

✓ The expenditure should not fall under the categories outlined in sections 30 to 36.

✓ It should not be classified as capital expenditure.

✓ It must not be a personal expenditure of the assessee.

✓ The expenditure should have been incurred in the previous tax year.

✓ It should relate to the business conducted by the assessee.

✓ It must have been spent solely and exclusively for the purpose of the business.

✓ It should not have been incurred for any purpose that is illegal or prohibited by law.

Sale consideration on transfer of immovable property

When the stamp duty value of land or buildings exceeds 110% of the consideration received or accruing from the transfer, the stamp duty value is considered as the full value of the consideration.

Presumptive Scheme

Section 44AD applies to resident individuals, resident Hindu undivided families, and partnership firms (excluding limited liability partnerships) engaged in any business, except those involved in specified professions, earning income in the nature of agency business, or hiring or leasing goods carriages. Income is computed on an estimated basis at a rate of 8% of turnover. This rate is comprehensive, meaning no further deductions are allowed under any other section, including remuneration or interest to partners.

Medical Insurance

Under Section 80D of the Income Tax Act, 1961, premiums paid up to Rs 25,000 for medical insurance are eligible for tax deductions. This benefit extends to covering your spouse, children, and parents. However, this deduction isn't applicable if you're running a startup alongside a full-time job where your employer provides medical insurance coverage.

Donation

Donating money not only brings the satisfaction of doing a good deed but also offers tax benefits. To avail of tax benefits through donations, it's essential to donate to registered charities and funds like the PM's Relief Fund. Additionally, donations to recognized political parties also qualify for tax breaks.

Amortization of Telecom License Fees

To qualify for deduction:

✓ The expense must be for capital purposes.

✓ It must be for obtaining the right to operate telecommunication services.

✓ The expense can be incurred before or after starting the business, during any previous year.

✓ Payment must have been made to obtain the license.

Deduction amount:

✓ The payment can be deducted in equal parts over the period from the year of payment until the license expires.

✓ The deduction begins in the year of actual payment, regardless of when the liability for the expense was incurred, following the accounting method used by the taxpayer.

Conclusion

Tax relief measures are not just about reducing the financial burden of small businesses; they are also aimed at encouraging entrepreneurship, promoting digitalization, and boosting job creation. Options like presumptive taxation, GST composition scheme, start-up tax holidays, and deductions for expenses provide much-needed relief to small business owners.

By taking advantage of these provisions, small businesses can focus on growth and innovation instead of being overwhelmed by tax compliance. However, business owners must stay updated with the latest amendments and seek professional advice to maximize their tax benefits legally and effectively.

In essence, tax relief is a tool that transforms challenges into opportunities, enabling small businesses to thrive and contribute significantly to the nation’s economy.

Here are some questions and answers on the topic:

Q1. What is the Presumptive Taxation Scheme and how does it benefit small businesses?

Answer: The Presumptive Taxation Scheme (Sections 44AD, 44ADA, 44AE) allows small businesses and professionals to declare income at a fixed percentage of turnover, instead of maintaining detailed books of accounts.

For businesses, profit is assumed at 8% of turnover (6% if transactions are digital).

For professionals like doctors, lawyers, or consultants, income is assumed at 50% of receipts.

This reduces compliance, audit requirements, and tax-related expenses, making it easier for small businesses to operate.

Q2. What tax relief is available for start-ups under Section 80-IAC?

Answer: Eligible start-ups recognized by the government can claim a 100% tax holiday for 3 consecutive years out of the first 10 years of incorporation.

This applies to businesses engaged in innovation, technology development, or improvement of products and services.

It helps start-ups reinvest profits into expansion without worrying about immediate tax liabilities.

Q3. How does the GST Composition Scheme reduce the tax burden for small businesses?

Answer: Under the GST Composition Scheme:

Small businesses with turnover up to ₹1.5 crore (₹50 lakhs for service providers) can pay tax at a lower fixed rate instead of normal GST rates.

Example: 1% for traders, 5% for restaurants, 6% for service providers.

Businesses under this scheme file fewer returns and maintain simplified compliance.

Thus, it reduces both tax liability and compliance costs.

Q4. What deductions and incentives are available for

small businesses to reduce taxable income?

Answer: Small businesses can claim several deductions such as:

Business expenses: rent, salaries, electricity, professional fees, advertising, etc.

Depreciation: on plant, machinery, and other assets.

Section 80JJAA benefit: 30% additional deduction for employing new staff.

Digital payments benefit: Lower presumptive tax rate (6% instead of 8%).

These provisions directly reduce taxable income and overall tax burden.

Q5. How can small businesses benefit from loss carry forward and set-off provisions?

Answer: If a small business incurs a loss in a financial year, it can carry forward the loss and adjust it against profits of future years.

Business losses can usually be carried forward for 8 years.

Unabsorbed depreciation can be carried forward indefinitely.

This ensures that businesses facing initial challenges do not suffer long-term tax disadvantages.