Tax benefits and incentives for MSMEs in India

Micro, Small and Medium Enterprises (MSMEs) is justifiably called the backbone of Indian economy and there are numerous tax benefits for MSMEs in India. They are the biggest employment generator not just in urban India but also in smaller towns and villages. Apart from contributing a third of India’s manufacturing output and 45% of the country’s exports, the MSMEs also contribute 6.11% of the manufacturing GDP and 24.63% of services GDP in India. However, the MSME sector is fraught with challenges – technology and capital being the primary. The government of India in a bid to sustain and promote this sector has introduced a slew of tax benefits and incentives to propel its growth.

In the Union Budget 2023-24, the government has proposed several benefits and incentives for the MSME sector. One of the important proposals is the interlinking of portals like Udyam, ASEEM and e-Shram, credit schemes and blended capital facilitation under NABARD, to name a few. Another step is the provision of tax benefits for MSMEs as it is an immediate and tangible way to support the sector.

In this blog, we shall highlight the tax benefits for MSME in India and incentives and subsidies that MSMEs enjoy in India.

What are the tax benefits for MSMEs in India?

Concessional tax rate:

Under the Income Tax Act, 1961, certain domestic manufacturing companies are eligible for concessional tax rates.

Coming under section 115BA of the Income Tax Act, these companies are eligible for a tax rate of 25% instead of the usual 30%. Businesses with ₹400 crores annual turnover are exclusively covered under this (Note – By definition, MSMEs are businesses with up to ₹250 crore in annual turnover, hence within the ₹400 crore limit).

While these companies are exempted from specified deductions, set-offs, and carry-forwards, the criteria states that the company must be set up and registered on or after March 1, 2016.

Another benefit that MSMEs can also avail is a tax rate of 22% under section 115BAA, provided that they comply with certain conditions. MSMEs can avail of this reduced tax rate by calculating their total income without considering various deductions, depreciation, and set-offs. They are also exempt from the payment of maximum alternate tax under Section 115JB.

Thirdly, domestic companies in the manufacturing domain can also opt for a 15% tax rate under section 115BAB. The requirement under 115BAB is similar to the conditions under section 115BAA. However, the following criteria are mandatory:

• Set up and registered on or after October 1, 2019.
• Cannot claim deductions under section 80-ID.
• Cannot be involved in any other business.

Presumptive tax scheme:

Apart from concessional tax schemes, MSMEs can also avail presumptive tax scheme like Section 44AD and reduce their tax liability. There are certain conditions that need to be fulfilled to qualify for these schemes. Some conditions are:

• Section 44AD is available to eligible businesses who has a total turnover or gross receipt of ₹2 crore or less.
• Presumptive taxation scheme under section 44ADA is available for professionals.
• Good carriage businesses can opt for section 44AE.

Pro tip: As an MSME, you can compare your tax liability under the applicable presumptive tax scheme and decide if it is beneficial for you.

New benefits:

According to the Union Budget 2023, the tax benefits for new and eligible start-ups are further extended. Currently, a total of three consecutive year tax incentive during the first ten years of their incorporation is provided to eligible start-ups established before March 31, 2023.

Moreover, under Section 115BAB that allowed a reduced 15% tax rate for newly incorporated domestic manufacturing companies, the finance minister has extended the last date for commencement of production or manufacturing from March 31, 2023 to March 31, 2024.

Further, MSMEs who are engaged in secondary steel production are now eligible to get an extension of customs duty exemption on steel scrap. Additional relief will also be granted to MSME secondary steel producers as announced in the Union Budget 2023.

It may be mentioned that the eligibility of an entity to be classified as MSME is based on the investments made in plants, machinery, or equipment. As per the new definition of MSME based on investment amount and turnover of the enterprise:

What are government incentives for MSME?

Apart from tax benefits, the government of India has been instrumental to introduce a slew of incentives for MSME. The Union Budget 2022-23 also focusses on ease of doing business for MSMEs. Some of the incentives that MSMEs can avail post the MSME Udyam registration include:

• Marketing Assistance scheme for providing marketing support to MSMEs launched to enhance the marketing competitiveness of MSMEs and provide them a platform for interaction with the individual/institutional buyers.
• Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE) that provides collateral free loans up to ₹100 lakh for individual MSME on payment of a guarantee fee to the bank.
• Technology and Quality Upgradation Support to MSME whereby MSMEs will be assisted with funding support for setting up of carbon credit aggregation centres, etc.
• Credit Linked Capital Subsidy for Technology Upgradation (CLCSS) that provides 15% subsidy for additional investment up to ₹1 crore for technology upgradation by MSMEs.

To sum up: How to avail the tax benefits and incentives for MSMEs

The government realises the importance of the MSME sector in shaping up the economy of India and have initiated several incentives and subsidies for MSME.

In order to avail of these benefits, you must register your business on the Udyam portal. Moreover, visit the portal to find out about the different schemes that are introduced by the government and check your eligibility. You can also visit B2B platforms for MSMEs, like Tata nexarc, to grow your business.

Tata nexarc, our goal is to help MSMEs find new opportunities and accelerate growth. Our offerings include small business loans, information on government tenders, logistics solutions, etc. to boost your business growth.