Small and medium businesses are at the heart of the economy occupying a bulk of the financial activities in the country. This sector provides jobs and incomes to millions of people. With the onset of the digital revolution, there are a lot of start-ups cropping up in every part of the country. However, companies in this sector had to pay more taxes when compared to larger companies due to lack of exemptions in the past. Let us take a look at this year’s budget and examine its impact on small businesses.

  • Deduction in income tax

During the latter part of the budget speech, the Finance Minister proposed to reduce income tax of small companies with an annual turnover of up to Rs 50 crore to 25%. This move brings down the income tax rate by as much as 5% from the current rate of 30%.

A reduction of such magnitude will benefit around 96% (6.67 lakh) of the companies in India. Small business owners consider this to be a step in the right direction as it would make them more viable and competitive with respect to larger companies.

  • Cut in presumptive tax

In addition, small businesses with an annual turnover of up to Rs 2 crore also benefit from a reduction in presumptive income tax. At the moment, 8% of the total turnover is considered as presumptive income under Section 44AD of the Income Tax Act. The Finance Minister reduced this value to 6% of the total turnover. This is applicable only for transactions that occur through digital means. This will bring greater transparency in the MSME sector.

  • FDI policy

The Foreign Investment Promotion Board (FIPB) will be abolished in effect from the financial year 2017-18. This move has brought cheers from players in the MSME sector. A greater increase in the inflow of Foreign Direct Investment (FDI) will only expand investments significantly for small businesses.

  • Minimum Alternate Tax

Over the years, there has been strong demand for the abolition of Minimum Alternate Tax (MAT). The Finance Minister has addressed this by stating that it was not practical to either reduce or remove MAT at present, however the plan of phasing out of exceptions would kick in from 1st April 2017.

He has also proposed an increase in the carry forward of MAT from a period of 10 years to 15 years. This gives companies an extension of five years before they have to pay their MAT.

  • Tax breaks to start-ups

In addition to the income tax exemptions provided to start-ups in the last year’s budget, the period of profit-linked deductions has been increased. The Finance Minister announced that this limit has been changed to seven years from the current five years. However, it is important to note that the tax breaks are applicable only on the profits made by start-ups for three years.

The bottom line

Small and medium enterprises are looking at the Budget with mixed reactions. The reduction in income tax by 5% was welcomed by everyone. But on the other hand, many believe that the budget has not addressed other issues such as support schemes and allocations for small businesses post the demonetization effect.