When a business opted for the presumptive scheme of taxation under section 44AD in the past, 8% of its total turnover was taken as net chargeable income under the tax. But, the government has announced a new incentive for businesses in which they can reduce this tax rate to 6%.
Tax reduction under the new scheme:
Going digital is one of the main economic objectives of the government. So this is a motivation for the small and medium businesses who perform their business transactions through electronic mediums. As said by the finance minister, small businesses can save up to 30% of their taxes by utilizing this scheme and going cashless.
An important requirement for traders and businesses is to have all their payments through digital means to take the benefit of this scheme. Hence, the deemed profit rate shall be reduced from 8% to 6% for those who satisfy the requirement.
Who all can benefit from this scheme:
SMEs who have already adopted the digital transaction system will benefit the most. If your business has been accepting payments through digital transactions since 1st April 2016, you can claim tax benefits under the scheme up to 31st March 2017.
And if you have missed that opportunity, you can still benefit from the scheme by having your future transactions through electronic modes.
One limitation of the scheme is that all transactions done through cash are still liable for taxation at 8% under the deemed profit presumptive taxation scheme.
Some additional benefits of the scheme!
- Raising Capital through Investment will become easier for small business owners as the profit margins will improve. An investor will also be more willing to put his money in a business with healthy profit margins.
- Getting Unsecured Business Loans through banks and NBFCs will also get easier for SME owners with an increase in profits. However, non-banking financial companies are in a better position than the banks because traditional banks in India are slow in digital initiatives.
- Another benefit will be raising credit rating as more profits mean lesser credit liabilities and eventually a good balance sheet thereby raise the business credit score which will help in securing more financial resources for growth and expansion.
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