Starting a business is a pretty huge step, and it comes with a big set of underlying responsibilities as well. From scouting locations and supplies to hiring to handling the entire financial accounts of your business – all of these can get into your head and bog you down, especially the part about managing your accounts. More so, if you don’t have much prior experience with this.
The first question that might strike you is What taxes do I need to pay and how much? Well, this is where we have come to help. We got all questions (at least, most of them) covered with this quick and comprehensive guide.
Small Business Taxes 101
Taxes are not that difficult to understand as we are made to think, but only if we start from the basics. So, let’s start with the two common kinds of business ownerships and their corresponding tax liabilities.
- If the business is being run as a sole-proprietorship, it is liable to pay the same tax as an individual. The threshold limit for such is Rs 2.5 lakh, up to which it doesn’t have to pay any taxes.
- In the case of a private limited company, a partnership company, or a limited liability partnership (LLP), it has to pay regular business taxes on its total income.
While the exact taxes vary with each business, here are nine of the most common small business taxes that one might have to pay:
- Personal Income Tax
- Payroll Tax
- Fringe Benefits Tax
- Goods and Service Tax
- Excise Tax
- Custom Tax or Duty
- Corporate Income Tax
- Dividend Distribution Tax
- Capital Gains Tax
Once you hire people and start expanding your business, you have to withhold personal income tax from their pay as well as contributions for social security and insurance. That is called payroll or withholding tax. Along with this, if you are paying special allowances to your employees, you will have to fringe benefit tax on those amounts.
Once the overall turnover reaches a certain level, you will be liable to pay GST on most goods and services that you sell, based on the specific tax slab. On certain goods, you may also have to pay excise tax, and if you import goods, you will have to incur customs tax as well.
Eventually, if you decide to incorporate your business, your business profits are no longer personal income. Instead, they become corporate income, and your business faces corporate income tax on those amounts. Additionally, if your business turns a profit selling significant assets, you may have to pay capital gains tax, and finally, if your business distributes dividends, there is a distribution tax on that.
Incentives For Adopting A Cashless Economy
In an effort to transform our economy into a digital and cashless one, the Government of India has decided to incentivise the small business owners by giving a lower rate of 6% on their total turnover. This means that they would get a total tax savings of at least approximately 40%.
“There will be a significant tax benefit for small traders if you turn digital. It is a tax incentive to support digitisation of the economy,” Mr. Arun Jaitley, the late Finance Minister of India, had told the media.
To achieve the said tax benefit and save on their taxes, traders and businessmen have to make all their transactions through digital means and avoid any cash exchange.
For a more detailed understanding of taxes and what applies to you, it is advised that you consult with an accountant. They may be able to help you calculate your taxes and give you tips on filing tax returns.