Small Business Tax: What Taxes Apply to Your Business

It’s July – the taxman’s favorite time of the year. But do we really understand taxes and which ones apply to our business? Let’s find out some important points about small business tax.

Understanding small business tax

The concept of a ‘small company’ was introduced by the Companies Act, 2013. As per the act, companies are considered small on the basis of their capital and turnover. The companies in this category get certain exemptions/relief.

Criteria to be fulfilled

• It should be a private limited company
• No more than Rs 50 lakh in paid-up capital
• The turnover should not go beyond Rs 2 crore

On 5th June 2015, The Ministry of Corporate Affairs (MCA) provided some exemptions to private companies. Additional exemptions were added by the MCA on 13th June 2017.

The Companies Act, 2013

There are some special provisions and exemptions available to a small business as per the Companies Act, 2013. These include:

Signing annual returns – Annual returns can be signed by the company secretary. In the absence of a company secretary, a single director of the company can sign the document.

Board meeting – The prerequisite for small businesses is only two board meetings annually. There needs to be a minimum 90-day gap between meetings.

Financial statement – A cash flow statement need not be included in a small businesses financial statement.

Annual returns – Small businesses need to provide details of the cumulative sum of compensation given to directors and not details of payment to each director/key person in the company.

No mandatory rotation of auditors – As per Section 139(2) of the Companies Act, 2013, small businesses are exempted from this requirement.

Section 44AD and presumptive taxation

According to Section 44D, a person or business with a turnover of under Rs 2 crore can reveal their profits at 8 percent or greater than 8 percent. It’s up to the business and tax has to be paid only on that amount.

A presumptive tax was set up by the government of India to offer small business tax assesses reduced tax burden and relief from tedious work. Those who follow this scheme need not continue with everyday books of accounts, and income tax can be declared by them at the prescribed rate.

There are two sections for the presumptive tax scheme – section 44AD and 44AE of the Income Tax Act, 1961. Those who adopt either of these schemes needn’t get their books audited.

For better understanding, here’s an example of presumptive tax:

If the turnover of a business is Rs 1 crore, a person can declare that the profit made was only Rs 8 lakh and pay tax on that amount only.

Eligibility to fall under the presumptive tax scheme

• Hindu Undivided Family (HUF)
• Individual resident taxpayers
• Simple partnership firms (excluding limited liability partnership firms)

Conditions to be satisfied

• The annual turnover of the individual or firm should not have crossed Rs 2 crore in the previous year.
• A person or firm who hasn’t already claimed a deduction during the assessment year under sections 10A, 10AA, 10B, 10BA and Section 80HH to 80 RRB can embrace this scheme.
• Firms or individuals involved in hiring goods carriers cannot make use of this provision.
• Under this scheme, regular maintenance of accounts and other supplementary papers which document their expenses is not needed.
• Small businesses are exempted from review by a Chartered Accountant.

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