SMEs & Taxation

Small & Medium Enterprises (SMEs) make up for a majority of businesses and a bulk of employment in developing countries and thus their taxation process becomes a subject for discussion. They are one of the most rapidly growing business segments and thus should be aware of information regarding taxation.

Registering for tax
Any SME or a new business needs to be registered with the government to avail any kind of tax incentives offered by the government. The company must be primarily be approved by Registrar of Companies (ROC) to begin business in a country like India. Registration also qualifies the SME to attain a taxpayer identification number (TIN) which is a pre-requisite for conducting business operations. They also need to register for a permanent account number (PAN) and pay VAT or sales tax. They also need to be member of Employees Provident Fund Organization (EPFO) and Employees State Insurance Corporation (ESIC). 

Paying the right taxes gives your company better value

Each state of India has a separate registration which is covered under Shops and Establishments Act. Stamp duty also needs to be paid at the time of registration. Even though the tax details are a bit complicated, tax compliance is necessary for smooth operations of business. Also, to set up a new business or to get licences for the same, SMEs need to visit various authorities both at State and municipal levels. The procedures could involve the participation of a wide variety of agencies regarding building permits, land use approvals, power and water connections and obtaining final occupancy certificates, etc.

Making use of tax benefits
Besides setting up, there are regulations which govern the hiring of labour and employees for a particular organization. These regulations vary according to the size of the company and are often very strict pertaining to employee rights. SMEs can benefit from a range of tax benefits which the government has allocated to encourage their growth. For example, new businesses can avail a substantial reduction in employer NI (National Insurance) contributions.

They can also utilise capital allowances for buying an asset such as cars, tools or other equipments related to the business. They do not need to deduct the expenditure from their trading profits and can claim a capital allowance for the same. This can also be used for various expenditures related to converting space for commercial benefit, investing in research and development and other heads which can be diverted to boost production. Topics such as research and development are also encouraged by the government and SMEs can enjoy additional tax benefits on their investment in that sector. Many SMEs in the export-import sector are also eligible for paying excise duties.

To continue a long term business, any SME should be competent in its accounting. The services of a reliable and efficient professional is a must. Also, besides the proprietor’s tax returns, payroll taxes of the employees also need to be filed. Most of this information is filed on a quarterly basis and advanced filing always get some incentives offered by the government. Three kinds of financial statements are presented for the accounting which includes balance sheet, income statement and the cash flow control.

There is a famous saying, 'A stitch in time saves nine'. So, know your taxes, plan their returns wisely and harvest satisfaction & mental peace later.