Budget 2017 – Tax Rate For SMEs With An Annual Turnover Up To $7.6 Mn Reduced To 25%

This year’s budget saw a string of announcements for the middle class and also focussed a spotlight on the Startup India ecosystem, going full steam ahead.

Out of the various announcements that were made, a welcome change was the one for MSMEs (medium and small enterprises). Finance Minister, Mr. Arun Jaitley in the budget announcement stated that for MSMEs with an annual turnover or gross receipts of up to $7.6 Mn (INR 50 Cr), a five percent rebate on corporate tax from 30% to 25% will be granted.

As per Aravind Srivatsan, Partner – Direct Tax at PWC, the tax rate of 25% to MSME sector is a good option to reduce corporate tax rates within the limited resource available.

The reduction in the corporate income tax will be applicable from FY 2017-18. So, all small and medium scale companies with turnover up to $7.6 Mn , as well as new companies can claim the benefit of this reduction.

However, only domestic companies are eligible to avail this tax benefit. Foreign companies and other forms of businesses like Limited Liability Partnerships and partnership firms are not.

Khushboo, Head, ITR filing at a legal consultancy firm, LegalRaasta said, “This is certainly a positive relief for SMEs and startups as more than 90% of businesses in India have a turnover of less than INR 50 Cr. Earlier, when the tax rate was 30% or higher, we observed that most startup founders & employees drew higher salaries, to reduce company net profit and save tax. This 25% tax initiative will promote retention of capital in the startups as profit reserves, and thus promote future investment.”

Apart from this, HUFs (Hindu Undivided Family Business) and individuals will have to pay income tax at 30% for income above INR 10 Lakhs. This move will benefit about 96% of the companies (MSMEs) in India and is a relief that the community will value. The basic rationale behind the move is to promote private limited companies with a structured form of business.