As of January 2025, the number of MSMEs registered on the Udyam portal has reached 5,84,06,752

5 income tax reliefs that professionals, small businesses expect in Budget 2025 MSMEs play a pivotal role in economic growth and employment. Therefore, to further boost small and medium businesses in India, the government should consider rationalising certain income-tax provisions for MSMEs and professionals in Budget 2025

Suresh Surana

Practising Chartered Accountant

India has one of the largest startup ecosystems in the world and is expected to witness sustained growth in the coming years. As per data from the Ministry of Micro, Small & Medium Enterprises, as of January 2025, the number of MSMEs registered on the Udyam portal, including the Udyam Assist Platform (UAP), has reached 5,84,06,752. MSMEs play a pivotal role in economic growth and employment. Therefore, to further boost small and medium businesses in India, the government should consider rationalising certain income-tax provisions for MSMEs and professionals in Budget 2025. These are:

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1. Reduce income tax rate for Partnership Firms and LLPs

Professionals and small businesses are often incorporated as partnership firms or LLPs instead of being incorporated as companies due to ease of formation, low cost of operation, reduced compliance burden and many such factors. As per current income tax rules, partnership firms and LLPs are taxed at flat 30% (plus applicable surcharge and cess) resulting in a maximum effective tax rate of 34.94% in most cases. However, businesses set up and operating as private limited companies are given the benefit of reduced effective income tax rates such as 25.17% or 17.16%, subject to meeting certain conditions.

Also read: Income Tax Budget 2025 Expectations Live Updates

Thus, in order to promote entrepreneurship and to reach the milestone of USD 7 trillion economy by 2030, there is a need to reduce the income tax rates for partnership firms and LLPs or introduce a concessional regime for partnership firms and LLPs having turnover up to a certain limit so as to bring them at par with the corporates.

Alternatively, a special tax regime may be introduced, allowing partnership firms and LLPs to opt for a concessional tax rate of 22% (plus a 10% surcharge and 4% cess).

2. Rationalise TDS rates for start-ups, small businesses

Certain sections of the Income Tax Act provide a nominal TDS rate. For instance, Section 194C - applicable for contracts -imposes a TDS rate at@ 1% or2% depending upon the nature of tax deductee, whereas 194H- applicable for commissions -imposes a TDS rate of 2%. However, the TDS rates in certain other sections (Section 194J - applicable for Professional Services) is 10%.

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Subjecting small businesses and start-ups to TDS, say 10%, imposes a restriction on their liquidity, which is a vital factor for smooth functioning of their business operations and creates working capital issues. Thus, it is expected that the TDS rates will be rationalized and reduced from 10% to 5% on professional services under section 194J.

Further, the newly introduced Section 194T mandates a 10% TDS on payments like salary, commission or interest credited to partners, causing potential cash flow issues and administrative challenges. This includes estimating income prematurely, adjusting for unforeseen profits/losses and reconciling allowable deductions under Section 40(b). It is recommended that the government should either withdraw Section 194T and instead track payments via the Annual Information Statement or reduce the TDS rate to 2% for ease of compliance.

Also read | Income tax deductions are not inflation linked hitting taxpayers harder: Budget 2025 needs to hike these

3. Issue of non-grant of full TDS credit appearing in Form 26AS

As per the existing income tax return (ITR) processing mechanism, small businesses and professionals are not granted full TDS credit appearing in their Form 26AS in cases where the income offered in the ITR form (as per books) is lower than what is reflecting in Form 26AS.

It is important to note that the receipts appearing in Form 26AS may be pertaining to income already offered to tax in preceding financial years or may be the receipt of advance income and appearing in the current year's Form 26AS due to difference in the method of accounting followed by the deductor and the taxpayer.

The result is non-grant of TDS credit to the taxpayer either in the preceding financial year in which income has been offered (as TDS credit does not appear in Form 26AS for that financial year) or in the subsequent year in which it is appearing in Form 26AS (as the income as per books is lower than gross receipts appearing in Form 26AS), resulting in loss of TDS credit to the taxpayer.

Therefore, in such cases, it is recommended that the ITR processing mechanism procedure be modified to ensure TDS Credit is allowed in the year in which it is appearing in Form 26AS even if gross receipts as per Form 26AS are higher than income as offered in the ITR.

4. Disallowance for delay in payments to Micro or Small Enterprises u/s 43B(h) may be restricted to delays beyond 90 days

Budget 2023 amended section 43B of the Income Tax Act by inserting sub-clause (h) with respect to the payment made to micro or small enterprises registered under MSMED Act. As per the newly inserted law, if an amount payable to micro or small enterprises (registered under MSMED Act) remains outstanding beyond the period (15 days or 45 days, as applicable) specified in section 15 of MSMED Act, by the buyer, such amount is disallowed under section 43B in the year of delay. However, the buyer can claim the deduction in the year in which liability is actually paid under section 43B(h) of the IT Act, 1961.

Based on the current rules, the entire amount payable to such micro or small enterprises is disallowable under section 43B if it is not paid within the aforesaid timeline and is allowable in the year of payment. This provision has received mixed response as several large enterprises face difficulty in dealing with micro or small enterprises, particularly in businesses where the credit period is much longer. To achieve a balance, the disallowance may be restricted to those cases where the payments is delayed beyond a period of 90 days. This will also reduce the administrative burden for the businesses.

5. Allow LLPs to opt for presumptive taxation

Sections 44AD and 44ADA provide simplified presumptive taxation for small businesses and professionals and are applicable to individuals, HUFs, and partnership firms. However, LLPs, which are otherwise treated at par with partnership firms under the Income Tax Act, are excluded from this benefit. This exclusion imposes significant compliance burden on LLPs despite their small-scale operations.

Given the turnover thresholds for presumptive taxation, extending these provisions to LLPs will simplify compliance without revenue loss to the government. It is recommended that LLPs be allowed to adopt presumptive taxation under these sections.

(The article is written by Dr Suresh Surana, a practising chartered accountant.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

This story originally appeared on: India Times - Author:Faqs of Insurances