This article has been written by Nandhini N. pursuing a Remote freelancing and profile building program from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction

Recently, policies established by the government have focused on making India a better platform for investment opportunities for global business. Out of the policies, let us discuss below the recent amendments made in the area of taxation and how those have enabled the formation and running of businesses in India. 

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Need for taxation

Taxes are a source of income for the government. The amount collected through various forms of taxes is invested by the government in building the strength of the nation by creating infrastructure facilities and providing amenities. Governments invest the revenue generated from taxation in a myriad of ways to build and maintain the infrastructure that is essential for the well-being and progress of the nation. This includes constructing and repairing roads, bridges, and other transportation systems; developing and maintaining educational institutions, hospitals, and other public facilities; and providing essential services such as national defence, law enforcement, and disaster relief. By investing in infrastructure, governments create a conducive environment for economic growth, improve the quality of life for citizens, and enhance the overall competitiveness of the nation.

In addition to infrastructure development, taxation revenue is also used to finance social programmes and services that aim to promote equity and address societal challenges. These programmes may include healthcare, education, unemployment benefits, and other forms of assistance for vulnerable populations. By investing in social programmes, governments strive to create a more just and inclusive society, reduce poverty and inequality, and ensure that all citizens have the opportunity to reach their full potential.

Furthermore, tax revenue is essential for funding public services such as law enforcement, national defence, and disaster relief. These services are crucial for maintaining public order, protecting the nation’s sovereignty, and responding effectively to natural disasters and emergencies. By investing in public services, governments ensure the safety and well-being of their citizens and contribute to a stable and secure society.

Effects of taxation

Business often establishes patterns of production, administration, and investment principles. However, the taxation policies and changes by the government bring disruption to this pattern, which is called the effect of taxation. Some of the effects of taxation are highlighted below.

Reduction in disposable income 

Disposable income is the final income left in the hands of taxpayers for their personal use or consumption. The levy of taxes reduces a person’s disposable income, which reduces the person’s ability to consume, as a result of which changes in the consumption pattern are made, thereby affecting the ability of an individual to invest.

When a small business owner is taxed heavily, it could have a negative impact on startups, thereby affecting the nation. However, there are policies that provide certain benefits and exemptions to startups, thereby promoting their growth.

But not all startups get the benefits. For instance, a supermarket owner who opens a proprietorship concern does not get the benefits that a private startup would get. The proprietorship is bound to pay the taxes of a normal taxpayer, and this might reduce his investment and consumption patterns, which can hinder his idea of starting his own business.

Influence on production

Taxation plays a crucial role in an organisation’s decision regarding the volume of production. The level of production can be increased or decreased by increasing or decreasing the tax rates for the product.

If we take indirect taxes, we can see that there is no GST on fresh juices; however, carbonated cold drinks have a GST rate of 28% and a 12% compensation cess. Whereby it is clearly seen that the government wishes to reduce the production of carbonated cold drinks by levying a higher tax rate on them.

Similarly, under the Income Tax Act, lottery winnings and online gaming are taxed at 30%; however, other businesses are taxed at a rate starting at 22%; proprietorship businesses even have the option to not pay taxes up to a total income of Rs. 700,000.

Thus, the government increases taxes on harmful products and activities, thereby trying to curb their production or activity level to the minimum. 

Improves Price stability

Taxes help the government keep a margin over the pricing of the product, and they also act as a guard against inflation.

For example – GST on Readymade garments has two rates of taxation, and the rates are fixed based upon the per unit pricing of the garment. If the product is priced below Rs. 1000 per unit, then it is taxed at 5%, and if it is priced above Rs. 1000 per unit, it is taxed at 12%.

This particular example above benefits both large scale and small scale industries, where large scale industries can reduce their cost of production by achieving economies of scale and small scale industries could achieve growth by increasing production due to reduced GST rates for lower cost goods.

A similar example can be seen for hotel rooms, where different levels of GST rates are attracted based on the pricing of the rooms. Thus, the government is increasing the scope for small scale industries and pushing large scale industries towards achieving economies of scale, which will benefit the nation as a whole.

Similarly, the government lays customs duty on imported goods, so that the pricing of the goods becomes similar or higher than locally manufactured goods.

Recently, the government has increased the duty on several finished products or goods that are being imported and reduced the duty on the raw materials of goods that are needed for manufacturing. 

One such product is Electric Kitchen chimneys, where the duty on import of electric chimneys is raised from 7.5% to 15%, but the chimney’s heat coil used in the manufacture of the chimneys is reduced from 20% to 15%

The government is introducing various other schemes for improving the manufacturing or production sector in India.

Promote regionally balanced growth 

A nation always has to focus on balanced growth, which means it has to make all the people equally grow. Taxes are the best way to achieve this. Taxes help collect money from the rich and distribute it to the poor.

Under the provisions of the Income Tax Act, there are special concessions and deductions for businesses started in backward areas. These concessions shall motivate a person to start a business in a backward area, thereby providing employment opportunities, infrastructure facilities to people in those areas, which shall aid as a pathway for their growth.

Similar provisions were also provided under the indirect taxes for the promotion of the industrially backward districts.

Easy compliance procedures

The recent policies have worked towards making the compliance procedures easy and try to cut down on the administrative costs involved in the business.

GST is one such case where people can relate to where the compliances have been reduced and the e-filing has enabled the business to reduce their cost and effort on being in line with the compliances compared to the paper-based procedures. The new portal for income tax filing also aims for the same, which has made the portal user friendly and has been structured in a way that reduces the time and effort of the auditors, assessors, and everyone else involved.

Both of these portals provide additional information that can be easily collaborated on by the auditors, and any missing information could be addressed before compliances are done, thereby reducing errors and the time of the proceedings.

Where GST helps us verify the purchases of the business by providing us timely reports in GSTR 2A, the income tax has come up with the Annual Information System [AIS], both of which shall enable the auditor as a checking process and verify the same with the records provided by the business owners. Not just the filing procedures, the proceedings are also dealt with in a faceless manner, thereby ensuring fair practice is followed.

The income tax portal has enabled faceless proceedings and appeals; this ensures that all the related evidence is submitted online, as a result of which no face-to-face meeting is required and there is no knowledge of who is the officer handling the case. This ensures or curbs the probability of bribery.

Recent amendments

Under Section 115 BAC of the Income Tax Act, which is commonly known as the New Tax Regime, the basic exemption limit has been increased to Rs. 300,000, and thereafter, the tax slabs increase by 5% for each increase of Rs. 300,000. The highest tax rate is 30%, which is for income above Rs. 15,00,000. Also, the rebate has been increased to Rs. 25,000 for the assessee opting for the new tax regime.

 A new Section called Section 115 BAE is introduced for the benefit of co-operative societies, which stipulates a tax rate of 15% for societies engaged in the manufacturing of articles and 22% for societies engaged in non-manufacturing activities.

The deduction under Section 43B, which relates to statutory payments, can only be made when actual payments are made, despite an organisation following an accrual basis of accounting. A deduction on interest expense – can be claimed only when payments are made to companies registered under the MSME Act within 45 days of the receipt of goods or services. Also, the outstanding balances need to be disclosed separately in the financial statements.

The threshold limit for the presumptive taxation scheme has been increased to Rs. 3 crores for business and Rs. 75 lakhs for profession – if at least 95% of the total transaction has been made through non cash mode.

Benefits from recent amendments

From the above changes, we can clearly see that the policies are aligned towards promoting startups and growth of the business, like the increase of the basic exemption limit and rebate for income up to Rs. 700,000, which is a huge incentive provided for people in proprietorship businesses.

Also, the introduction of certain restrictions on expenses claimed, like deductions on interest for MSME suppliers, is only provided if payment is made within 45 days, which ensures that small and medium enterprises are getting their payments duly done. This encourages budding entrepreneurs to scale their businesses to a larger level, as they are sure of the policies and rules backing them up.

An increase in the limit under the presumptive taxation scheme is a huge benefit for businesses as there is no burden on the company to maintain a huge set of accounts, and it also reduces administrative costs like auditing fees, accountant charges, and others.

Tax laws for small and large businesses

Tax laws for small and large businesses play a crucial role in shaping their financial landscape. Understanding and adhering to these laws is essential for businesses to operate legally and efficiently. Here’s a more detailed elaboration on tax laws for small and large businesses:

  1. Income tax
    • Small businesses:
      • Small businesses, often organised as sole proprietorships or partnerships, are subject to individual income tax rates. Their business income is reported on their personal tax return, and they pay taxes based on their combined income.
    • Large businesses:
      • Large businesses, typically corporations, are separate legal entities and are subject to corporate income tax rates. Their profits are taxed at corporate rates, and dividends paid to shareholders are subject to personal income tax when received.
  2. Payroll taxes
    • Small businesses:
      • Small businesses with employees are responsible for withholding payroll taxes, including income taxes, Social Security (FICA), and Medicare (FICA) taxes, from their employees’ wages. These taxes are deposited to the appropriate government agencies.
    • Large businesses:
      • Large businesses have similar payroll tax obligations, but may also offer employee benefits such as retirement plans and health insurance, which have associated tax implications.
  3. Sales and use taxes
    • Small businesses:
      • Small businesses that sell goods or services may be required to collect sales or use taxes from their customers. These taxes vary by state and municipality, and businesses must comply with local regulations for collecting, reporting, and remitting sales taxes.
    • Large businesses:
      • Large businesses with a national presence may need to navigate complex sales tax laws across multiple jurisdictions. They often have dedicated tax departments or external advisors to ensure compliance.
  4. Property taxes
    • Small businesses:
      • Small businesses that own or lease property may be subject to property taxes. These taxes are typically assessed by local governments and are based on the value of the property.
    • Large businesses:
      • Large businesses with significant property holdings may have substantial property tax obligations. They may also benefit from tax incentives or exemptions offered by local governments to attract businesses and promote economic development.
  5. International taxation
    • Small businesses:
      • Small businesses engaged in international trade may encounter customs duties, tariffs, and other international tax regulations. They need to be aware of tax treaties and agreements between their home country and the countries they do business with.
    • Large businesses:
      • Large businesses with global operations face complex international tax issues, including transfer pricing, foreign tax credits, and controlled foreign corporations. They often have dedicated international tax teams or advisors to manage these complexities.
  6. Tax compliance and reporting
    • Small businesses:
      • Small businesses must maintain accurate financial records and comply with tax filing deadlines. They are typically responsible for preparing and filing their own tax returns unless they seek professional assistance.
    • Large businesses:
      • Large businesses have more complex tax compliance requirements and may be subject to additional reporting obligations, such as quarterly estimated tax payments and annual financial statement disclosures. They often work with tax professionals to ensure accuracy and minimise tax liabilities.
  7. Tax planning and optimisation
    • Small businesses:
      • Small businesses can engage in tax planning strategies to minimise their tax burden. This may include choosing the appropriate business structure, deducting eligible expenses, and utilising tax credits and deductions.
    • Large businesses:
      • Large businesses have more sophisticated tax planning opportunities, such as structuring transactions, utilising tax-advantaged investment vehicles, and managing intercompany pricing. They may also have dedicated tax planning departments or external advisors to develop and implement tax-efficient strategies.

Conclusion

Taxes are currently seen as a burden on the person, which makes them look for illegal ways of reducing the taxes. However,  current amendments or policies are made in such a way that they help a person plan their taxes by utilising the benefits provided and also ensure that India is created as a platform for budding entrepreneurs. We should understand that taxes are a form of income, which is how the government tries to ensure equality among people, and a major source for providing infrastructure that is accessible to all the people in the country.

References

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