Micro, Small and Medium Enterprises (MSMEs) play a significant role in the growth and development of India`s economy. These enterprises contribute to the country`s Gross Domestic Product (GDP) and employment generation.
The definition of Micro manufacturing and services units was increased to Rs. 1 Crore of investment and Rs. 5 Crore of turnover. The limit of small unit was increased to Rs. 10 Crore of investment and Rs 50 Crore of turnover. For medium Enterprises, now it will be Rs. 50 Crore of investment and Rs. 250 Crore of turnover.
Annual Survey Report of ministry of MSME (2021-22):
India has a vibrant MSME sector, with around 6.33 crore enterprises as of June 2020.
MSMEs play a crucial role in the Indian economy, contributing around 30% of the country`s GDP and 48% of its exports.
In FY 2020-21, the government announced various relief measures for MSMEs in response to the COVID-19 pandemic, including collateral-free loans, liquidity infusion, and credit guarantees.
The top three sectors in terms of MSMEs are "Food Products and Beverages", "Textiles", and "Chemicals and Chemical Products".
Uttar Pradesh, followed by Tamil Nadu, is the state with the highest number of registered MSMEs.
Around 99% of the total MSMEs are micro-enterprises, followed by 0.52% small enterprises and 0.01% medium enterprises.
In terms of employment, MSMEs provide livelihoods to around 11.10 crore people.
Around 48% of the MSMEs are owned by people belonging to the Scheduled Castes, Scheduled Tribes, and Other Backward Classes.
As of March 2020, the total outstanding credit to the MSME sector stood at Rs. 15.52 lakh crore.
The report also highlights various initiatives taken by the government to promote the growth of MSMEs, including the Prime Minister`s Employment Generation Programme (PMEGP), the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), and the Technology Centre Systems Programme (TCSP).
Organizational structure of MSME:
1. Sole Proprietorship concern.
2. Hindu Undivided Family.
3. Partnership Firms as per the Indian Partnership Act 1932.
4. Limited Liability Partnership Firms as per the Limited Liability Partnership Act 2008.
5. Private Limited Companies and Public Limited Companies as per Indian Companies Act 2013.
6. Co-operative Societies as per Indian Co-operative societies Act or the State Co-operative societies Act.
Provisions of Income Tax Act 1961 and Finance Act, 2022 with respect to the above types of MSME organizations.
1. Sole Proprietorship concern:
a. It can opt either old regime of taxation or New regime (Sec 115BAC) of taxation.
b. Alternate Minimum Tax (AMT) will be applicable in certain special cases
c. Following are the important deductions which can be claimed as per Chapter VIA (If it opts the regime of taxation) I. Sec 80CCC. II. Sec 80CCD III. Sec 80E IV. Sec 80EE V. Sec 80GG VI. Sec 80QQB. VII. Sec 80RRB VIII. Sec 80TTB IX. Sec 80U X. Sec 80C XI. Sec 80D XII. Sec 80DD XIII. Sec 80DDB XIV. Sec 80G XV. Sec 80GGA XVI. Sec 80GGC XVII. Sec 80-IA XVIII. Sec 80-IAB XIX. Sec 80-IC XX. Sec 80-IE XXI. Sec 80-IB XXII. Sec 80JJA XXIII. Sec 80 JJAA XXIV. Sec 80CCF
2. Hindu Undivided Family:
a. It can opt either old regime of taxation or new regime (Sec 115BAC) of taxation.
c. Following are the important deductions which can be claimed as per Chapter VIA (If old regime of taxation opts). I. Sec 80C II. Sec 80D III. Sec 80DD IV. Sec 80DDB V. Sec 80G VI. Sec 80GGA VII. Sec 80GGC VIII. Sec 80IA IX. Sec 80IB X. Sec 80IAB XI. Sec 80IC X. Sec 80E XI. Sec 80JJA XII. Sec 80JJAA XIII. Sec 80TTA
3. Partnership Firms:
a. Two types of taxation
i. As per sec 184
ii. Firms which do not comply with sec 184
b. A Flat Income tax rate of 30% on total income of the firms is to be paid by the firms
c. Alternate Minimum Tax (AMT) will be applicable in certain special cases
d. Following are the important deductions which can be claimed as per Chapter VIA. I. Sec 80G II. Sec 80GGA III. Sec 80GGC IV. Sec 80IA V. Sec 80IB. VI. Sec 80 IAB VII. Sec 80IC VIII. Sec 80 IE IX. Sec 80JJA X. Sec 80 JJAA.
4. Limited Liability Partnership Firms
As per the Limited Liability Partnership Act 2008. Income tax Assessment is as same as the assessment of the partnership firms
5. Private Limited Companies and Public Limited Companies as per Indian Companies Act 2013.
Companies can opt for assessment as per anyone of the following section
Old regime of taxation
Sec 115BAB MAT is not applicable @15% in the case of company opts taxation under the following sections.
i. Sec 115BAA
ii. Sec 115BAB
Following are the important deductions that can be claimed as per Chapter VIA if the company opts taxation under the old regime I. Sec 80G II. Sec 80GGA III. Sec 80GGC IV. Sec 80IA V. Sec 80IB. VI. Sec 80 IAB VII. Sec 80IC VIII. Sec 80 IE IX. Sec 80JJA X. Sec 80 JJAA. XI. Sec 80GGB XII. Sec 80LA XIII. Sec 80 PA
a. It can opt either old regime of taxation or new regime (Sec 115 BAD) of taxation.
b. Alternate Minimum Tax (AMT) @15% will be applicable in certain special cases
c. Following are the important deductions which can be claimed as per Chapter VIA (If old regime of taxation opts) I. Sec 80G II. Sec 80GGA III. Sec 80GGC IV. Sec 80IA V. Sec 80IB. VI. Sec 80 IAB VII. Sec 80IC VIII. Sec 80 IE IX. Sec 80JJA X. Sec 80 JJAA. XI. Sec 80 P
Union Budget 2023-24:
The Union Budget for 2023-24 has announced a significant boost to MSMEs, focusing on collateral-free guaranteed credit, timely payment by buyers, enhanced limits of presumptive taxation, and other relief to the sector.
The government will infuse Rs 9,000 crore into the corpus to revamp credit guarantee schemes for MSMEs, enabling additional collateral-free guaranteed credit of Rs 2 lakh crore and reducing the cost of credit by about 1%.
The scheme will give comfort to banks which are reluctant to lend to MSMEs in the absence of proper collateral and will boost fund flow to the distressed and fund-starved MSME sector.
The government will return 95% of the forfeited amount relating to bid or performance security to MSMEs in cases of failure by MSMEs to execute contracts during the Covid period.
To support MSMEs in the timely receipt of payments, the FM proposed the deduction for expenditure incurred on payments made to them by buyers only when payment is actually made to MSMEs.
The limits of presumptive taxation have been enhanced to Rs 3 crore and Rs 75 lakh, respectively, for the taxpayers whose cash receipts are no more than 5% of total receipts.
The PM Vishwakarma Kaushal Samman has been conceptualised for traditional artisans and craftspeople to enable them to improve the quality, scale and reach of their products to integrate them with the MSME value chain.
The scheme will include financial support, access to advanced skill training, knowledge of modern digital techniques and efficient green technologies, brand promotion, linkage with local and global markets, digital payments, and social security.
The Pradhan Mantri Kaushal Vikas Yojana (PMKVY) 4.0 will be launched, enabling demand-based formal skilling, linking with employers including MSMEs, and facilitating access to entrepreneurship schemes.
The government will introduce on-the-job training across all short-term courses while launching new age courses that will be industry-specific as part of the revamped Pradhan Mantri Kaushal Vikas Yojana (PMKVY) 4.0, to substantially improve the employability of Indian youth.
Ministry of Finance Measures:
Udyog Aadhaar Registration:
The government mandates the registration of Aadhaar card for availing benefits under this scheme. MSMEs can easily avail credit, loans and subsidies from the government by registering through the online or offline mode.
Zero Defect Zero Effect Scheme:
To ensure that goods manufactured for export meet the required standard and avoid rejection, the government launched this scheme. Exported goods are eligible for rebates and concessions under this scheme.
Quality Management Standards & Technology Tools:
This scheme helps MSMEs understand and implement quality standards and new technologies. The government conducts various seminars, campaigns and activities to sensitize businesses about the latest technology.
Grievance Monitoring System:
MSMEs can register under this scheme to have their complaints addressed. They can check the status of their complaints and reopen them if not satisfied with the outcome.
This scheme helps innovators implement new designs, ideas and products. The government finances 75% to 80% of the project cost. It promotes innovation in various fields.
Credit Linked Capital Subsidy Scheme:
Under this scheme, MSMEs are provided new technology to replace outdated technology. The government provides capital subsidies to upgrade and improve business operations. MSMEs can directly approach banks for these subsidies.
Women Entrepreneurship Scheme:
This scheme provides capital, counselling, training, and delivery techniques to women entrepreneurs. It is aimed at helping women start and expand their businesses
MOU: A formal Memorandum of Understanding (MOU) was signed between the Central Board of Direct Taxes (CBDT) and the Ministry of Micro, Small and Medium Enterprises, Government of India (MoMSME) for sharing of data by CBDT to MoMSME. The MoU will facilitate seamless sharing of certain Income-tax Return (ITR) related information by the Income Tax Department to MoMSME.The MoU marks the beginning of a new era of cooperation and synergy between the CBDT and MoMSME.
Presumptive taxation scheme: In 2016, the CBDT introduced a presumptive taxation scheme for small businesses with a turnover of up to Rs 2 crore. Under this scheme, MSMEs can declare their income at a prescribed rate (8% for non-digital transactions and 6% for digital transactions) and get relief from the burden of maintaining detailed books of accounts.
Tax incentives: The government has provided various tax incentives to MSMEs over the years, such as a lower tax rate of 25% for businesses with a turnover of up to Rs 250 crore and exemption from minimum alternate tax (MAT).
Online compliance: The CBDT has introduced various online facilities for MSMEs to file their tax returns and make payments, such as e-filing of tax returns, online payment of taxes, and electronic verification of returns.
Simplification of tax laws: The government has simplified various tax laws to make compliance easier for MSMEs. For instance, the GST system has been simplified and made more user-friendly for small businesses.
Awareness campaigns: The CBDT has launched various awareness campaigns to educate MSMEs about the importance of tax compliance and the benefits of paying taxes. These campaigns include workshops, seminars, and online tutorials.
Supreme Court Rulings:
In the case of CIT v. Vista Chemtech Pvt. Ltd. (2015), the Supreme Court held that deduction under Section 80-IC of the Income Tax Act, 1961, would be available to MSMEs on the entire profits of the eligible business, and not just on the profits derived from industrial activities.
In the case of CIT v. Core Health Care Ltd. (2008), the Supreme Court held that the deduction under Section 80-IB of the Income Tax Act, 1961, would be available to an MSME even if it had taken a loan to acquire the assets used in the eligible business.
In the case of Commissioner of Income Tax vs. M/s. NRA Iron and Steel Pvt. Ltd. (2021), the Supreme Court held that the tribunal cannot set aside an order of the Commissioner of Income Tax without giving any reasons or findings.
In the case of M/s. Mahaveer Kumar Jain vs. Commissioner of Income Tax (2021), the Supreme Court held that a deduction for bad debts under Section 36(1)(vii) of the Income Tax Act cannot be denied merely on the ground that the assessee has not written off the bad debts in its books of account.
In the case of The Commissioner of Income Tax vs. M/s. Jayshree Tea and Industries Ltd. (2020), the Supreme Court held that if an assessee has made a bona fide claim for deduction under Section 80IC of the Income Tax Act, the assessing officer cannot deny the same merely on the ground that the assessee did not produce a certificate from the appropriate authority.
In the case of Commissioner of Income Tax vs. M/s. Virtual Soft Systems Ltd. (2020), the Supreme Court held that an assessing officer cannot make a disallowance under Section 40(a)(ia) of the Income Tax Act if the assessee has deducted TDS but not deposited the same within the prescribed time limit due to reasons beyond its control.
Bringing MSMEs under Income Tax Net will promote Economic Growth:
Tax revenue: MSMEs form a significant portion of the Indian economy, and taxing them appropriately can generate substantial tax revenue for the government.
Infrastructure development: Tax revenue from MSMEs can be used to develop infrastructure in the country, which can further boost economic growth.
Investment in R&D: Tax revenue from MSMEs can be invested in research and development, which can lead to the development of innovative technologies and products that can improve the competitiveness of Indian businesses.
Job creation: MSMEs are one of the largest sources of employment in India, and taxing them can create incentives for them to formalize their operations and create more jobs.
Encourages compliance: Taxation can encourage MSMEs to comply with regulations and promote a level playing field in the market.
Enhance creditworthiness: Regular tax payment can help MSMEs establish a credit history, which can enhance their creditworthiness and access to finance.
Economic stability: Taxing MSMEs can help stabilize the economy by providing a steady stream of revenue to the government, which can be used to fund public services and welfare programs.
Promotes transparency: Taxation can promote transparency in business operations and reduce the scope for black money and corruption.
Improves governance: Taxation of MSMEs can also help improve governance by making it easier for the government to monitor and regulate business activities.
Attracts foreign investment: A stable tax regime can attract foreign investment, which can contribute to economic growth and job creation in India.
Some innovative measures that can be adopted to improve the income tax structure of MSMEs in India, drawing from best practices around the world:
Simplification of tax laws: Adopting a simple and transparent tax system, similar to that of countries like Singapore and Hong Kong, can reduce the burden of compliance for MSMEs.
Graduated tax rates: Introducing graduated tax rates for MSMEs, based on their turnover or profits, can provide incentives for growth and reduce the tax burden on small and growing businesses.
Tax holidays: Providing tax holidays for MSMEs in their early years of operation can incentivize entrepreneurship and promote innovation.
R&D tax credits: Providing tax credits for research and development activities can encourage MSMEs to invest in innovation, thereby increasing their competitiveness and contributing to economic growth.
Flat tax rate: Implementing a flat tax rate system, similar to that of countries like Estonia, can simplify the tax system and reduce compliance costs for MSMEs.
Threshold-based exemption: Providing threshold-based exemptions for MSMEs, like that of countries like Japan and South Korea, can encourage small businesses to grow and expand without being unduly burdened by taxes.
Online tax filing and payment: Providing an online tax filing and payment system can make it easier and more convenient for MSMEs to comply with tax regulations.
Tax incentives for eco-friendly practices: Providing tax incentives for MSMEs that adopt eco-friendly practices, such as using renewable energy sources, can encourage sustainable business practices and promote a greener economy.
Collaboration between tax authorities and MSMEs: Establishing a dialogue between tax authorities and MSMEs can help to address compliance challenges and promote a more conducive business environment.
Taxation education and training: Providing education and training on taxation for MSMEs can help to improve compliance and increase awareness of tax regulations.
The income tax structure for MSMEs in India has come a long way in the past decade. The government has launched several schemes to ease the compliance burden and promote growth in the sector. With the implementation of technology and digital initiatives, the process of filing taxes has become smoother and more efficient. The recent reforms such as the reduction of corporate tax rates and the introduction of faceless assessment are expected to boost the confidence of MSMEs in the country. This, in turn, will lead to greater investments, job creation, and economic growth. With the government`s focus on promoting entrepreneurship and innovation, the future of MSMEs in India looks promising. The growth of MSMEs will not only contribute to the country`s economic growth but also pave the way for a sustainable and inclusive economy.
AUTHOR & LEGAL EXPERT
CHAIRPERSON (THE PRESIDING OFFICER ) STANDING APPELLATE COMMITTEE OF AICTE, GOVT OF INDIA.
SENIOR STANDING COUNSEL, MADRAS HIGH COURT FOR INCOME TAX DEPT, MINISTRY OF FINANCE, GOVT OF INDIA.
SENIOR STANDING COUNSEL – SUPREME COURT OF INDIA & DELHI HIGH COURT FOR EdCIL, MINISTRY OF EDUCATION, GOVT OF INDIA.
ADDL GOVT PLEADER (AGP) MADRAS HIGH COURT, FOR GOVT OF PUDUCHERRY.
THE AUTHOR CAN BE REACHED AT MAIL: email@example.com
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