5 Things that every startup should know about taxation in India
Startups usually go frenzy during the initial launching days. Burdened by the deliverables, there’s an erratic sense of ascendancy when it comes to execution of ideas, managing setup costs, and staying true to their soul. On the financial end, they are usually prepared for initial loses of which some may go unaccounted. Failing to pay the attention early on may put you in tax jeopardy and may create an enigmatic situation to leverage on tax benefits. Let’s address that enigma and see how knowing important tax provisions can help you establish the startup.
This article outlines five important tax provisions that apply to every newly formed business.
1. Preliminary Expenses
The preliminary expenses are those incurred for setting up a business. This does not limit to expenses of new set up but also include the extension of an already existing unit.
Startups can avail a deduction of 5% of the total project cost. A company may choose to calculate the maximum deduction of 5% of the cost of the project or capital employed by the business. The amount is allowed as a deduction equally for five consecutive years.
Who can be the beneficiaries?
Any Indian company or a person other than a company who is an Indian resident is eligible.
It includes the following expenses
– Expenses incurred for preparing a project report or a feasibility report
– Conducting a market survey
– Legal charges paid to draft an agreement.
A Company can claim deductions on charges for preparation and printing of MoA and AoA as well.
2. Setting-off and carrying forward the losses
There are equal possibilities of loss in the inception stage. Losses are difficult to digest for any businessman. Here is an opportunity to convert them into benefits.
First, you can set-off the losses against income from a business. The loss in excess can be set-off against the income from other heads with subject to a few conditions. Any additional losses can be carried forward for the upcoming years. Such losses can be carried forward for up to the next 8 Assessment Years.
Your business can avail this benefit if all ITRs are filed within the due dates applicable to your business. Any delay will cease the benefit for the losses of the concerned year. Losses from other heads of income can also be carried forward subject to conditions.
3. Carrying forward the unabsorbed depreciation
Unabsorbed depreciation means the unutilized amount of depreciation which cannot be claimed as an expense due to lack of profit.
Apart from insufficient profit, this is typically a case of high-priced assets. It can be set-off against any heads of income in the current year income. If depreciation is still unabsorbed, you can carry forward the same for any number of years.
4. Research Expenses
The scientific research expenses related to business is allowed as a deduction to a certain limit. Let’s find out what is it.
Expenditure on research expenses is dealt with under section 35 of the Income Tax Act. 100% deduction is allowed for the revenue expenses and capital expenses u/s 35(1) and (2). Capital expenses are deductible in the year in which the capital expenses are incurred. But, there is no depreciation allowed for such capital expenditure.
This means that the expenses to purchase assets for the research (except land) and the revenue expense for first 3 years of business is deductible. A manufacturing company for in-house research can alternatively claim a deduction of 200% of expenses u/s 35(2AB) for an approved project.
If you do not have an in-house research team, you can make a contribution to registered organizations like research laboratories, National Laboratories or universities. However, you must be informed about the eligibility and other conditions for the deduction.
5. Presumptive Taxation Scheme
A business person has to maintain regular books of accounts in a given manner. You can get relief from this tedious work by opting this scheme. Presumptive taxation schemes are framed for different taxpayers. (Related sections: 44AD, 44ADA, 44AE)
Section 44AD – Applicable to the resident individual, partnership firm and HUF engaged in Business. Here, 8% of the total turnover or receipts is considered as profit and gains from business and chargeable to income tax.
Section 44ADA – For the assessee engaged in a profession. Here, the tax is applicable only on 50% of the gross receipts.
Section 44AE – This applies to a unit engaged in the business of plying, hiring or leasing goods carriages.
What are the benefits?
A business that adopts the presumptive taxation scheme can declare income at a prescribed rate. In turn, the business is relieved from the tedious job of maintenance of books of account.
Further, while declaring the income in a given manner, many of the expenses are deductions are disallowed. Therefore, it is assumed as post deduction income. You need to carefully choose to opt for this scheme every financial year considering the actual net income percentage and other factors.
Understanding your income flow is as important as understanding the business operations. You shouldn’t overlook the taxes and exemptions applicable to your business and activity. These five provisions are must to know for every business. If any of these are useful for your business, you may contact a professional for the details and actions.
DISCLAIMER : Views expressed above are the author’s own.