Also since the tax can be paid in one shot at the time of tax returns filing, the business persons get to keep the tax amount with them-selves. Thus reducing the pressure on the working capital which is the life line of any business and more so for SMB’s. Compare that with the sales tax and service tax which has to be filed every month. This helps the business people to do what they are good at – business.
“Mention the word accounting, and otherwise competent business men and women suddenly grit their teeth, furrow their foreheads, and start uncontrollably pulling out chunks of their own hair. Why is this? How can a craft, which is nothing more than a tool to keep track of the inflow and outflow of cash, be thought of with such contempt and fear? The mystery becomes even more puzzling once you realize that ACCOUNTING is essentially the discipline of counting money. And since most people start a business to make money, it seems rather silly they shouldn’t enjoy counting it.”
-Peter J. Patsula in
‘Adopting an easy to use accounting system’
The Budget 2009 has spared small businesses from a lot of administrative hassles. The Finance Minister has submitted for approval by the Parliament that small businesses below the turnover of Rs.40 lakhs have the option to declare income at 8% of their turn over and pay taxes accordingly.
Extended Benefits
There are some very good extended benefits also. If the businesses accept for treating their income at 8% of turnover:
- They do not have to maintain their books of accounts.
- They do not have to pay advance tax.
- The entire tax can be paid along with their income tax returns filing.
The Situation Today
The earlier form of ‘self-assessment’ for small businesses was still cumbersome as the papers had to be maintained and there was need for an auditor to certify them for the filing. Once the auditor declares the income then the tax had to be paid as per other corporates. This has traditionally led to a lot of manipulation of expenses to show reduced income.
Many a time the reduced income for income tax filing has proved counter-productive to small businesses. This is particularly when the business looks for expansion and needs a loan. Since the income is shown to be too low in the tax filings, banks will not be able to lend. The business owners then are forced to land up with local financiers who literally fleece them. Paying the tax would have been a better option.
What The New Provisions Mean To Small Businesses?
The new provisions having set income at a reasonable 8% of turnover has hit the nail at the right place. This is neither too low (for the Government to collect taxes) not too high (for the Businessman to evade taxes).
There is much better compliance expected. In effect the tax as a percentage of the turnover is pretty less.
Let’s take an example to understand this better.
Assume a business is having a turnover of Rs 40 Lakhs
8% of turnover (8% of Rs 40 Lakhs) =3, 20,000/-
Income Tax Payable 30% ** of Rs 3, 20,000/- =96, 000/-
(**current corporate tax rate for businesses with taxable Income below Rs 1 million)
This works out to be 2.4% of the turnover. Definitely not a big burden for any business person! Especially for businesses with a Net profit of anything over 4-5%. Else it does not make sense to business anyways.
Also since the tax can be paid in one shot at the time of tax returns filing, the business persons get to keep the tax amount with them-selves. Thus reducing the pressure on the working capital which is the life line of any business and more so for SMB’s. Compare that with the sales tax and service tax which has to be filed every month. This helps the business people to do what they are good at – business.
Not only do they save on time (from administrative efforts) they also get to keep the tax for building their businesses.
Startups and Loss Makers
The above scheme will not benefit startups which are yet to make profits and existing loss making businesses. They will still need to substantiate their case using their auditors and by maintaining their books of accounts.
Hail the Indian Taxman
The tax authorities in India have always been pro-people in their rates and administration compared to developed countries (Tax rate in USA is close to 40%) and most of the developing countries.
One important point must be noted while making the above comparison: Although the effective tax rate in India too was close to 40%, Abolishing the FBT and non-applicability of the 10% surcharge on SME’s tilts the balance in favor of the Indian tax rates
The support to the small businesses in Budget 2009 in the provision discussed above is a proof for the people friendly tax authorities of India. Kudos Mr. Finance Minister. After all the hype and hoopla created over multi-billion dollar companies and their needs and wants from the Budget, it was high time a budget focused on the small guys. And Pranab did just that. Albeit it must be added that it’s just the beginning and there are many more expectations from Small and Medium Businesses in the coming times.