While the country is embarking on a mass vaccination drive, The Union Budget 2021 – announced on 1 February, promises to be the economic vaccine that would drive recovery across sectors. The implementation of the same will have a huge role in determining the true outcome of the budget.
Here are five key budget proposals on direct tax that I think would have an impact on small and medium businesses
1. Timely deposit of Employees’ contribution to labour welfare funds
Budget Proposal: Late deposit of employees’ contribution to labour welfare funds (eg. Provident Fund (PF), Employees State Insurance) by the employers will not be allowed as a deductible business expenditure to the employer.
Implication: Here is an example to understand the implication. Let’s say the due date for PF contribution for the month of January is 15th of February. If the employer delayed in depositing the employees’ contribution to PF beyond the 15th, there were judicial precedents that were being relied upon to claim such delayed deposits as deductible expenditure for tax purposes. The budget proposal aims to discourage delays in depositing the employees’ share by disallowing such expenditure if the same is not remitted within the due date prescribed under the PF Law (i.e.15th of the subsequent month).
This move would also have the effect of protecting the interests of employees.
2. TDS/TCS related
a. Non-filing of Income Tax Returns may adversely impact cash flows
Budget Proposal: In order to discourage the practice of non-filing of returns by persons in whose case substantial tax (Rs. 50,000 or more) has been deducted/collected for each of the past two years, a proposal has been made to increase the rate of TDS/TCS to twice the specified rate or 5%, whichever is higher.
The deductee who has defaulted in filing returns for the past two years would receive payment after TDS/TCS at a higher rate, thereby impacting the timing of cash flows. Example: Mr X, a service provider has not filed his Income Tax Returns for FY 19-20 and FY 20-21 and the TDS in his name for each of those years is Rs. 60,000 and Rs. 75,000 respectively. In such a case, a businessman availing of professional services from Mr. X in FY 21-22 would be required to deduct tax at 20% (i.e. twice the specified rate of 10% for professional services). *
*The provisions of the Finance Bill in this regard appear to be anomalous and it would be pertinent to revisit the provisions once the Bill is assented to by the President of India.
This may result in practical difficulties as the business owner would now also be required to know if his vendor has filed returns for the past two years in order to determine the rate of TDS.
b. TDS on Purchase of Goods
Budget Proposal: Introduction of a TDS provision requiring tax to be deducted at 0.1% on the purchase of goods from a resident. This is applicable only if the value of purchases from a single person exceeds 50 lakh rupees in a financial year. In order to reduce the compliance burden, it is also proposed to provide that the responsibility of deduction shall lie only on the persons whose turnover exceeds Rs 10 crores in the preceding financial year.
There may be a situation in which a single transaction is covered by both, the new TDS provision and the TCS provision on the sale of goods. In such a scenario, it is proposed that the TDS provision would override the TCS provision.
Implication: This cast an additional responsibility of TDS on business owners who now have to constantly track supplier accounts to monitor whether the thresholds are being breached or not.
3. Increased turnover threshold for Tax Audit
Budget Proposal: Increase the turnover limit for tax audit for persons who are undertaking 95% of their transactions digitally from Rs. 5 crores to 10 crores.
Implication: Apart from reducing the compliance burden on Small and Medium Enterprises (SMEs), this move incentivizes non-cash transactions to promote the digital economy.
Despite the turnover threshold for tax audit being enhanced, the requirement for audit would also have to be evaluated from a presumptive taxation stand-point. Example: A business with a turnover of Rs. 7 crores and undertaking atleast 95% of its transactions digitally may still need to evaluate the applicability of audit under the Income Tax Law (though its turnover is below Rs. 10 crores) if its profits are less than a prescribed percentage* of its revenues.
*The percentages refer to those contained in the presumptive taxation provisions.
4. Impetus to Dispute Resolution for Small Tax Payers
Budget Proposal: Setting up of a Dispute Resolution Committee (DRC) for taxpayers in whose case:
- Returned income is <= 50 Lakh rupees; and
- Variation proposed in the specified order is <= 10 lakh rupees
Implication: This gives small tax payers an alternative route to take when served with an adverse order* with the object of settling disputes in a more timely manner.
* There are multiple other conditions that need to be satisfied to be eligible to approach the DRC
5. Tax Benefit for Start-ups
- Extension of the eligibility period by one year for eligible start-ups to claim tax holiday
- Extension of the eligibility period for claiming capital gains exemption for investment made in start-ups by one more year to 31st Match, 2022.
Implication: The aforementioned proposals incentivize the setting-up of start-ups in the country and also encourage investments being made in them. However, it is important to note that not every start-up is an eligible start-up for tax holiday and capital gains exemption. Thus, care should be taken to evaluate eligibility before planning transactions.
Whatever has been discussed above is only the tip of the ice-berg. The budget proposals are a lot more extensive in nature and should you wish to discuss more on the same, feel free to write to firstname.lastname@example.org
The author Rishi Dabrai can be reached at email@example.com or at +919945236982
Partner, NDJ & Associates
“DISCLAIMER: The views expressed are solely based on the opinion of the author and Capital Float (CapFloat Financial Services Pvt Ltd) does not necessarily endorse or subscribe to it. Capital Float (CapFloat Financial Services Pvt Ltd) shall not be liable for any loss/damage caused to any person/organization directly or indirectly. Capital Float does not guarantee the contents of the views expressed and the same are not binding on Capital Float.”
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Many enterprises launch themselves with great hope and confidence. However, on an average, one in every four start-ups fails to make it past its first year due to a paucity of funds. Low profits, high overhead or unforeseen expenses, incorrect product pricing, and overstocking of inventories can lead to negative cash flow for any small or medium enterprise (SME).
When the paucity of funds has been created by dubious business strategies, the owners need to review their style of working and make required changes. Other than that, there are times when the enterprise is doing well in its industry and simply needs some additional funds to add more facilities for customers/employees, buy raw materials, develop new product features or expand the business to a new location.
A lack of adequate working capital for such steps towards growth or innovation does not imply that the business is unprofitable. It merely needs to ask for an SME loan from a formal lenders at this stage.
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Oct 24, 2018
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Having got off to a good start, a business typically aims to grow and explore new opportunities. To make this happen, businesses need to move in the right direction. This is especially true for a business in its early days when managing operations efficiently is a challenge, thereby taking precedence over matters of strategic importance such as goal-setting and business development. One way by which you can change gears from the routine rigmarole is making a #BizResolution. These are exactly like making New Year Resolutions, except that these will help you boost business growth in your enterprise.
A business resolution is like a promise or commitment you make to achieve specific objectives in the coming year. Since it involves your enterprise, the level of commitment to making it happen is high.
Here are 5 ways business resolutions can help drive growth in your business. Business resolutions can help:
Set realistic goals: While your company is being steered by a sound business plan, it is critical to break down broad business objectives into achievable goals. So, while your plan projects a specified growth rate, you need to identify smaller goals that will lead to this result. For instance, your #BizResolution could be to “improve relationship with suppliers,” which will have a positive effect on inventory, product availability, and therefore customer satisfaction and higher sales.
Drive business strategy: It is common for new entrepreneurs to get lost in the operational hassles and simply not have the bandwidth to focus on more value adding tasks such as digital marketing or human resources. The urgent matters take precedence over what’s important, and the business slows down for want of strategic inputs. In this case, a #BizResolution can pinpoint to strategic focus areas, thereby helping realign the business priorities for growth.
Upgrade skills: Running a successful business is a constant learning process, which involves learning from competition, adopting best practices, upgrading skills and so on. This is a must in today’s rapidly changing environment, which demands that companies constantly innovate. Yet, somewhere in this quest for efficiency, the learning element takes a backseat. Having a skillset-oriented business resolution can help foster a culture of continuous learning and skill upgradation.
Focus on expansion: A high-growth focus is what most investors look for before investing in a new business. To expand, you need capital for which enterprises usually need investors or lenders. Hence, you must assess the potential for new markets, new partnerships, complimentary product categories (upselling and cross-selling), new channels (online), and new customer segments. Making such growth-centric business resolutions will keep you firmly on the road to expansion and success.
Develop a niche product: A niche product builds on the premise that certain small market segments are typically underserved. Find your blue ocean strategy and explore a better chance to grow. Make a #BizResolution to invest time and effort into a promising, niche product, which allows you to differentiate your offerings and create an uncontested market space.
Business resolutions need not be yearlong commitments. Periodically assess your product or solution with respect to the industry environment and change tack—set new objectives or redraft your existing ones. The idea is to stay in tune with emerging opportunities and align your company with market needs to make the most of growth prospects.
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Oct 24, 2018
The hotel industry is one of the fastest growing domains in India, and, together with the travel segment, it was valued at $136.2 billion by the end of 2016. The implementation of Goods and Services Tax (GST) will help the hotel and travel industry largely by bringing down costs for customers, consolidating the multiple taxes into a single tax value and decreasing transaction costs for concerned business owners. However, certain challenges accompany these outcomes as well.
A look at the conditions pre- and post-GST
Similar to other industries in India, there were multiple taxes applicable to hotel industry. These were chiefly in the form of value added tax (VAT), luxury tax and service tax. For a hotel, if a room’s tariff exceeded Rs 1000, the service tax liability was 15%. With an abatement of 40% allowed on the tariff value, the actual rate of service tax was brought down to 9%. The VAT that ranged between 12% and 14.5%, as well as the luxury tax, was applied over and above this.
The GST impact on hotels and travel industry
Under the GST regime, the hospitality domain gets the advantage of standardised and uniform tax rates. The utilisation of input tax credit (ITC) has also become simpler and better. Complimentary food (such as offer of breakfast with room) that was separately taxed under VAT will be taxed as a bundled service under the GST system.
As a positive effect of GST for hotels, the end cost to be paid by the final consumers will decrease, which will help to attract more tourists and push up the growth of businesses in this industry. Conversely, it will also increase the revenue collection of the government.
The tax rates under GST for hotel industry have been set as:
|Room Tariff Per Day||GST Rate|
|Less than Rs 1000||NIL|
|Rs 1000 – 2499||12%|
|Rs 2500 – 7499||18%|
|More than Rs 7500||28%|
Most hotels in India follow a dynamic pricing policy, where they decide upon the tariffs manually as per the number of tourists expected in a certain season. The tariff, therefore, keeps changing according to the demand and supply forces. Since the GST rates vary for different tariff levels, hotels have to ensure that their billing software also changes the tax rate as per the room tariff throughout the distribution channels comprising travel agencies and online aggregators. Making such changes in the billing systems could take some time.
Positive aspects of GST
The Goods and Services Tax has brought some relief for the hospitality industry through:
Ease of administration
With the implementation of GST, the multiple state and central taxes levied on the tariffs of hotels have been done away with. This has helped to trim down the burden of different procedures of tax application and has resulted in better streamlining of the entire process.
Less confusion for customers
Tourists staying in hotels and availing some special services were largely confused by the multiplicity of taxes in their bills. For most of them, it was difficult to understand the difference between VAT, service tax and luxury tax. Under the GST system, they will see only one consolidated tax on their invoice, which will give them a clearer picture of what they are paying in tariffs and what is the tax charged on them.
Enhanced quality of service
Many tourists and hotel guests have had the cumbersome experience of waiting in the hotel lobby while their bill was being prepared. It often took longer to add the different tax components and prepare the final version of the bill to be paid by the customer. With GST, the managers have just one tax to calculate and that makes the checking-out process from hotels quicker and simpler.
Ease of using input tax credit
Entities in the hotel and travel industry can now easily claim and get input tax credit. They are entitled to get full ITC (input tax credit) on the inputs that they add. Due to the division of revenue between the centre and state governments, the multiple taxes paid before GST regime on inputs – like cleaning supplies, uncooked edibles for meals – could not be smoothly adjusted against the output. The calculation of ITC will be easier in the GST system.
Negative aspects of GST
The GST for travel industry and hotels also comes with its share of adverse impacts. With a taxation rate of 28%, the hotels charging tariffs over Rs 7500 are worst hit, as their final prices for customers will increase significantly.
Looking at the bigger picture, GST can hit the inflow of foreign tourists to India. Other Asian countries such as Japan and Singapore impose tax rates as low as 8% and 7% on their hotel and travel industry. This can become a big factor in making them more preferred tourist locations as compared to India.
Capital Float looks at GST for hotels and tourism as a mixture of simpler, smoother rules and seemingly higher costs & compliance. The trade associations of hotels and restaurants have been protesting for a lower tax rate of 5%, but it starts at 18% for a majority of them. The value of tourism industry in India is projected to grow by up to $280.5 billion in the next 10 years. How well the positive aspects of GST outweigh its negative effects is yet to be seen. Meanwhile, despite the challenges, the credit support for the development of new hotels and restaurants by an NBFC like Capital Float will continue to be consistent.
Oct 24, 2018