How owning a Business Save on Taxes ?

Small and medium businesses (SMB) are the backbone of Indian economy. Owning a Small business is one of the best ways to Save on Taxes and to create opportunities around the business. Let's explore how SMB businesses can create opportunities and save on taxes in both GST and income tax.

While it is not common, keeping Tax Planning as an integral part of small business opens excellent opportunities.

A business in India need to pay taxes, file periodic GST returns, and income tax returns (ITR) every year. Today, every business is required to be registered under GST for various compliance reasons, and obligations from the vendors and / or suppliers. Handling Income Tax, GST without proper planning may become cumbersome and might result in to higher outflow of taxes.

This document covers

Planning for GST to Save on GST
Create Opportunities and Save on Income Tax

A. Planning for GST to Save on GST

1. Planning for GST Registration

GST registration is mandatory if the turnover exceeds Rs 40 lakhs (in case of goods) and Rs 20 lakhs (in case of services). Taking GST registration without real requirement would result in Compliance cost and if the business don’t file returns on time, it will result in penalty and interest. Hence, we recommend every small business to analyse the need before proceeding with a GST Number.

2. Collecting GST from Customer

The SMB needs to collect GST from its customers. The SMB must mention its GST Identification Number (GSTIN) on every invoice and charge the GST from its customers

3. Taking Input Tax Credit

SMB needs to provide its GSTIN to every supplier. This way, the SMB can claim input tax credit on every purchase made to get help in the tax outflow

4. GST Payments and Filing

SMB needs to ensure that it is paying and filing every GST returns within due date to avoid huge penalties and interest. Even though there are no transactions, it needs to file nil returns.

5. Letter of Undertaking

If the SMB is exporting goods or services or providing the same to SEZ, it is recommended to take Letter of undertaking (LUT) to eliminate the need to charge GST and there by optimizing the cash flow

6. Claim the GST Refunds

If the SMB is exporting goods or services or providing them to SEZ, or if the SMB has accumulated ITC as a result of the inverted duty structure, the SMB may submit a refund application with the GST Department and claim the refund. This allows the SMB to address their cash shortages.

B. Create Opportunities and Save on Income Tax

Business needs to file their income tax returns every year. Every business need to pay tax depending on the profit earned. The tax rate would vary from 22% to 30% depending on type of the business and the income. Let's explore ways a SMB can save on income tax

7. Choosing the right Entity Type for SMB business

In India, we have different entity type (constitution) like proprietorship, partnership, LLP, Pvt Ltd etc. The Tax rates are different for each entity type. SMBs need to choose the right entity type depending on pros and cons

8. Hiring Family Members as employees

This is one of the best options to optimize taxes. It will help the SMB to reduce the profit and thereby reducing the taxes. If the family member doesn’t have any other income, SMB can give the salary up to Rs 5 lakhs to avoid tax under their individual tax returns or more with a careful planning.

9. Claiming Preliminary Expenses

The costs incurred before commencement of business can also be claimed as deductions under Income Tax. Maintain a proper invoices to claim these expenses so that the profit will be reduced and optimize the tax

10. Proper recording of Expenses

Every business has expenses in various forms. These expenses can be paid either through cash or bank. Maintaining proper bills /invoices will help in reducing profits and optimizing the tax. Recommended to spend using banking or digital channels to have these recoded in the bank statements directly.

11. Invest in business assets & Claim Depreciation

Purchasing the assets on business name will help in claiming depreciation. Businesses can purchase assets like machinery, equipment, office furniture, 2-wheeler, car, vans and / or transportation vehicles. Depreciation will help in reducing the profits over the years. This will help in taxes outgo

12. Digital Receipts and Payments

It is recommended to convert the cash transactions into digital modes. Cash expenses of more than Rs 20,000 per day per person will be disallowed. Also having cash expenses and cash receipts more than 5% needs Tax Audit. By Converting the cash receipts and payments into digital mode, SMB’s can save compliance cost and optimization of taxes

13. Deduct TDS and file TDS

There are several transactions which needs TDS deduction under Income Tax Act. Non deduction of TDS makes the expense to be disallowed. Hence to claim expenses, TDS needs to be deducted if it is specified by Income Tax Act.

14. Regular Expenses

There are many expenses like electricity expenses, travelling expenses, fuel expenses, telephone expenses, internet expenses, training expenses, legal expenses, marketing expenses, consultant expenses, promotional expenses from traditional and digital mediums etc which SMBs pay from personal accounts. It is recommended to pay from business accounts to record as business expenses and reduce profits

15. Show Trading Losses

In general, if a small and medium-sized business (SMB) engages in stock market trading and incurs losses in derivatives, equity, or other assets, they do not disclose these losses in their income tax returns. However, if SMB declares all losses in their income tax returns, they can take advantage of set-off losses and transfer them forward for up to eight years.

16. Pay Advance Tax

It is recommended to pay advance tax at regular intervals to avoid Interest under different sections. This will help the SMBs in optimizing unnecessary cash flow from business

17. Filing Income Tax Returns on time

Filing Income Tax Return on time will enable the SMBs to carry forward the losses for future years, help in avoiding the penalties and raise the credit worthiness of a business.

Overall

A careful plan could yield a substantial benefit to small & medium businesses, not only save on GST, Income Tax in addition to creation of addl. opportunities for the family.

As the years pass, it becomes increasingly challenging to secure employment opportunities. Governments frequently are compelled to encourage the growth of small enterprises, a phenomenon that is being observed globally.