Budget: Why it's a boon for small businesses

"Mention the word accounting, and otherwise competent businessmen and women suddenly grit their teeth and furrow their foreheads, and start uncontrollably pulling out chunks of their own hair. Why is this? How can a craft, which is nothing more than a tool to keep track of the inflow and outflow of cash, be thought of with such contempt and fear? The mystery becomes even more puzzling once you realize that accounting is essentially the discipline of counting money. And since most people start a business to make money, it seems rather silly they shouldn't enjoy counting it." -- Peter J. Patsula in 'Adopting an Easy to Use Accounting System'

The Budget 2009 has spared small businesses from a lot of administrative hassles. Finance Minister Pranab Mukherjee has submitted that small businesses below the turnover of Rs 40 lakh (Rs 4 million) have the option of declaring income at 8 per cent of their turnover and pay taxes accordingly.

Extended Benefits

There are some very good extended benefits also. If the businesses accept for treating their income at 8 per cent of turnover:

1. They do not have to maintain their books of accounts.

2. They do not have to pay advance tax.

3. The entire tax can be paid along with their income tax returns filing. 

The situation today

The earlier form of 'self-assessment' for small businesses was cumbersome as the papers had to be maintained and there was need for an auditor to certify them for the filing.

Once the auditor declares the income then the tax had to be paid like corporates did. This has traditionally led to a lot of manipulation of expenses to show reduced income.

Many a time the reduced income for income tax filing has proved counter-productive to small businesses. This is particularly when the business looks for expansion and needs a loan.

Since the income is shown to be too low in the tax filings, banks will not be able to lend. The business owners then are forced to land up with local financiers who literally fleece them. Paying the tax would have been a better option.

What the new provisions mean to small businesses?

The new provisions having set income at a reasonable 8% of turnover has hit the nail at the right place. This is neither too low (for the government to collect taxes) not too high (for the businessman to evade taxes).

There is much better compliance expected. In effect the tax as a percentage of the turnover is pretty less.

Let's take an example to understand this better.

Assume a business is having a turnover of Rs 40 lakh.
8% of turnover (8% of Rs 40 lakh) = Rs 320,000.
Income Tax Payable = 30%** of Rs 320,000 = Rs 96,000.

(** current corporate tax rate for businesses with taxable income below Rs 10 lakh (Rs 1 million)

This works out to be 2.4 per cent of the turnover. Definitely this is not a big burden for any business person; especially for businesses with a net profit of anything over 4-5 per cent. Else it does not make sense to business anyways.

Also since the tax can be paid at one go at the time of tax returns filing, the business persons get to keep the tax amount with themselves thus reducing the pressure on the working capital which is the lifeline of any business and more so for SMBs.

Compare that with the sales tax and service tax which has to be filed every month. This helps the business people to do what they are good at -- business.

Not only do they save on time (from administrative efforts) they also get to keep the tax for building their businesses.

Start-ups and loss-makers

The above scheme will not benefit start-ups which are yet to make profits and existing loss making businesses. They will still need to substantiate their case using their auditors and by maintaining their books of accounts.

Hail the Indian taxman

The tax authorities in India have always been pro-people in their rates and administration compared to developed countries (Tax rate in the United States is close to 40 per cent) and most of the developing countries.

One important point must be noted while making the above comparison: Although the effective tax rate in India too was close to 40 per cent, abolishing the FBT and non-applicability of the 10 per cent surcharge on SMEs tilt the balance in favour of the Indian tax rates.

The support to the small businesses in Budget 2009 in the provision discussed above is a proof for the people-friendly tax authorities of India.

Kudos to the Finance Minister! After all the hype and hoopla created over multi-billion-dollar companies and their needs and wants from the Budget, it was high time a budget focussed on the small guys. And Mukherjee did just that. Albeit it must be added that it's just the beginning and there are many more expectations from Small and Medium Businesses in the coming times.