9 Jan 2020, 11:21 — 9 min read
Just like ‘a pitcher fills drop by drop’ the same holds true for every little tax saving for SMEs. Starting a business comes with a lot of statutory compliances that can become a burden in due course. In this article, I will try to reduce your tax burden by acquainting you with tax saving tips for small and medium businesses for the financial year 2020.
Plan smartly and save taxes!
We are moving towards a digital economy but still cash payments are an integral part of our economy. People still find it the most convenient mode of payment. But the same is strictly not recommended for business expenditures, here is why:
Let us understand it better with the help of an example:
M/s ABC made a cash payment of INR 50,000 in relation to business expenditure. What shall be the tax treatment?
In this situation the entire INR 50,000 shall be disallowed as an expenditure. As a result, M/s ABC will end up paying additional tax of INR 15,600.
In the course of business, dealing with relatives is normal. You should always be cautious while making a business deal with your relative(s). If any payment related to business expenditure is made to a relative, then any excess unreasonable amount may be disallowed by the assessing officer.
You may think, 'On what basis will the assessing officer decide that the payment is unreasonable?'
The assessing officer will compare the market price of the same transaction and any excess payment may be disallowed.
TDS (Tax Deducted at Source) non-compliance does not only result in fine and penalties, but TDS non-compliance also results in disallowance of expenditure to a certain extent.
Also read: 7 tips for the new financial year
Payment to non-resident (other than salary)
If any payment is made to NRI on which TDS is required to be deducted but:
then 100% of such amount shall be disallowed.
If any payment is made to a resident like commission, interest, professional fees on which TDS is required to be deducted as per the provisions of the Income Tax Act but
then 30% of the sum will be disallowed.
For example, ABC has made a payment of professional fees of INR 1,50,000 on which TDS is required to be deducted but the same has not been done. In this case, the amount disallowed will be
Salary payment outside India or to non-resident
If any payment of salary is made outside India or to NRI and if
then 100% of such sum shall not be allowed as a deduction.
If TDS is deducted in subsequent year or deducted in previous year but paid to government after the due date of return filing, then such disallowed sum will be allowed in the subsequent year. However, in the case of salary payment outside India or to non-resident, then expenses will not be allowed even if TDS deducted or paid in subsequent years.
Employees are the most important asset of any organisation and many business expenses are incurred in relation to them. This includes:
Also read: A list of tax benefits for startups in India
Deduction of bad debts can be allowed subject to the following conditions:
Provision for bad debts is not allowed as deduction except in the case of banks (subject to certain conditions).
If any bad debts is allowed as deduction in previous years but now same has been recovered. Such recovery of bad debts shall be taxable in the year of recovery.
You must avoid late filing of tax returns whether related to direct tax or indirect tax since it results in heavy amount of penalties and deduction of penalties also not allowed.
Any expenditure shall be allowed as a deduction subject to following conditions:
List of some common expenses
You should always file your Income tax return on time due to following reason
Also read: Benefits of filing Income Tax Returns (ITR)
Q. Is there any option for small businesses to pay taxes under presumptive scheme?
A. Business having turnover up to INR 2 crore may opt presumptive scheme u/s 44AD and can show 6%/8% of gross turnover as income.
Q. What is the due date of filing income tax return for individual having income from business & profession?
A. The due date of filing return is 31st July 2020. However, if tax audit is applicable then date is 30th September 2020. The due dates are subject to extension by CBDT (Central Board of Direct Taxes).
Q. Are there any exceptions to disallowance of cash expenses under section 40A(3)?
A. There are some exceptions of section 40A(3) which is given under Rule 6DD. In the following scenarios even if business expense is made in cash that too for an amount exceeding INR 10,000 the same would be allowed as an income tax expense.
1. Where the payment is made to:
2. When a payment is made through
3. The adjustment made in books of account in case where payment is the adjustment which is being made for offsetting liability incurred by the assessee to the payee for the goods or services.
4. When payments are made to an individual
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