In light of the recent shock of demonetization, the government of India push to go India into a more digital, a more compliant, and subsequently a more vibrant economy was clear from the budget. With MSMEs being hit the hard with demonetization – the budget announced on Jan 1st laid out some good incentives to encourage growth across the MSME sector with an explicit remark that the biggest employment opportunities in India lie within this sector.

The minister of finance outlined the subsequent initiatives that were targeted towards driving growth with the MSME sector and to drive digitization among the MSMEs.

Reduction of Corporate Tax

The direct tax for companies having a turnover up to 50 Crores has been reduced to 25 to stand proud of half-hour .

This reduction of fifty may be a welcome move for MSMEs, as majority of them are under this threshold. This will give extra money liquidity for his or her business growth. This benefit will provide a good platform to MSMEs, and narrow the gap between MSMEs and larger companies. The bigger companies enjoyed a slim advantage because of a far better platform and expertise to avail the varied incentives, exemptions, then on available.

Thus, this reduction of rate of tax will make the micro and little enterprise products more competitive within the market, prove cost efficient, and accelerate the expansion of the business.

Digital turnover in presumptive scheme

In order to encourage MSMEs to proactively accept payments by digital mode, the concept of digital turnover is included within the Presumptive Scheme. This is applicable to businesses having turnover of not more than 2 Crores. Under this scheme, the prevailing rate of deemed profit of 8% is reduced to six in respect of the quantity of total turnover or gross receipts received through digital mode. However, the prevailing rate of deemed profit of 8% will still be applicable on turnover or receipt wiped out cash.

Let us analyse the business benefits of this in three different scenarios.

Scenarios Companies with 100 % Cash Turnover Business with 50 % Digital Turnover Business 100 % Digital Turnover
Turnover 2 crore 2crore 2 crore
Cash Turnover 2 crore 1 crore Nil
Digital Turnover Nil 1 crore 2 crore
7% Deemed Profit on cash turnover 20 lakhs 8 lakhs Nil
8 % Deemed profit on digital turnover Nil 8 Lakhs 12 lakhs
Total Profit ( Cash + Digital ) 20 lakhs 18 lakhs 12 lakhs
Firms (@ 25%) 4 Lakhs 3.5 Lakhs 3 Lakhs
Proprietary Concerns
(As per Income Tax Slabs)
2,54,925 1,93,125 1,31,325
Tax savings Firms Nil 50,000 1,00,000
Proprietary Concerns Nil 61,800 1,23,600

*Tax calculation based on FY 2017-18

Let us understand this better.

When the businessman makes the complete transaction in cash, his profit is presumed to be 16 lakhs, which is 8% of two crores. However, if he opts to hold out the whole transaction using digital modes (cheque or through the other digital means), his profit is presumed to be 12 lakhs, which is 6% of 2 crores. This leads to tax savings of Rs 1, 00,000 for firms and Rs 1,23,600 for proprietary concerns.

Even if the companies have half the turnover or receipts through digital mode or banks, a saving of Rs 50,000 (25% on 14, 00,000) for firms and Rs 61,800 for proprietary concerns can be achieved. This is an advantage for MSMEs. Thus, to leverage from the advantages , MSMEs need to embrace the digital platform.

Initiatives to facilitate digitization of business

The DigiGaon initiative aims to supply has a high speed broadband connectivity more than 1,60,000 gram panchayats, and pass on education and developed your skills on digital technology by end of 2018-19. This will go an extended way in meeting the challenges, in terms infrastructure and skill set availability, for MSMEs in rural areas to travel digital. The Government plans to promote the adoption of the BHIM app by introducing cash back schemes for merchants, and Aadhar Pay, a merchant version of the Aadhar Enabled Payment System.

These different initiatives, along side the substantial raise with their budget allocation for digital infrastructure, and arrangements to form secure and robust digital infrastructure in rural areas and to a large extent in urban areas, will help in driving the MSMEs to go towards a cashless economy.

Sweeter tax holiday for start-up enterprises

The direct tax holiday window for start-up companies to say deduction, with reference to gains and profits derived from the business, is extended to three consecutive years out of seven years from the existing 5-year limit. This will boost investment and cause the creation of more employment opportunities.

Lower limit for cash payment

The threshold limit of money payment to an individual has been reduced from Rs 20,000 to Rs 10,000 in a very single day. This implies that any payment in cash, above ten thousand rupees to an individual during a day, won’t be allowed as deduction within the computation of income from profits and gains of business or profession. It will have a greater effect on MSMEs thanks to their unorganized and informal pattern of working, and since they largely depend upon cash for daily payments.

Secondly, salaries and wages paid by MSMEs range between Rs 10,000 to Rs 15,000. Now, from 1 April, 2018 onwards, so as to urge the credit, these payments need to be made through a bank or via digital mode.

This is an accomplish to discourage cash transactions and drive the adoption of digital transactions for MSMEs.

Enhanced fund accessibility

The enhancement of the credit guarantee scheme for MSMEs, for loans up to Rs 2 crore (previously 1 crore) announced by the Prime Minster on 31st December, 2016, will give access to more funds to grow their businesses.

The budget incentives provided for MSMEs partly mitigate the impact of the demonetization aftermath, and drives MSMEs for better compliance through various incentives for digitization, thus creating a viable and vibrant growth path for MSMEs.

Go digital, Have Technology to leverage on the advantages and opportunities offered with that budget.

Credits: Tally Solutions

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