Micro, Small, and Medium Enterprises (MSMEs) form the backbone of the Indian economy. This is further exemplified by a recent report stating that India ranked fourth out of the 51 countries for having a high-quality ecosystem for entrepreneurship, attributed to the country's consistent improvement of businesses over time. 
 

MSMEs contribute to a third of India's manufacturing output and account for 45% of its exports. About 20% of them are rurally based as well, ensuring a steady income for smaller towns and villages. 
 

With this in mind, the Indian Government is trying to encourage more such MSMEs to mushroom across the country. One way they do this is by offering startups and MSMEs tax benefits.

New MSME Benefits: Revised Classification as Per MSME ACT 2006 Effective from July 01, 2020

MSME Registration Benefits and Features Under the Revised Classification

• Turn Over Based Criterion: Under the new classification, businesses with an annual turnover rate of up to ₹250 Crores are classified as MSMEs. This promotes more inclusivity and reduces the compliance burden of MSMEs 
   

• Simple Registration Process: This new change also simplifies the registration process by eliminating the need for businesses to provide multiple registrations.  
   

• Unique Identification Number: This will help provide a single reference point for all regulatory and compliance purposes and access several government schemes and benefits.
   

• Incentives and Subsidies: The Indian Government has announced several measures, such as reduced credit costs, subsidies for technology upgradation, and tax exemptions as key MSME registration benefits under the new classification structure.

MSME Tax Benefits

• Income Tax Exemption: This MSME tax exemption is available to businesses under Section 80J of the Income Tax Act. The exemption is available to businesses for 7 years from incorporation.
   

• Tax Holiday: This tax exemption is available to MSMEs that produce products like mineral oil, natural gas, and fertilisers under Section 80-IB. The tax holiday is available to MSMEs 5 years from the year of commencement of production.
   

• Reduced Tax Rates: MSMEs with an annual turnover of more than ₹50 Crores can claim a reduced tax rate of 25% under Section 115BA.
   

• GST Benefits: MSMEs with an annual turnover of more than ₹1.5 Crores can benefit from the Composition Scheme under the Goods and Services Tax (GST^@) regime. 
   

• Capital Gains Exemption: This exemption is available under Section 54GB if the MSME invests its capital gains from the sale of a long-term asset in the equity shares of a qualified startup.
   

• Investment Allowance: MSMEs that invest in plant and machinery/equipment can claim an investment allowance of 15% under Section 32AC.

New MSME Tax Benefits and Regulatory Ease in Budget 2023

• Increase in Threshold Limits Under the Presumptive Taxation Scheme

  The threshold limits under the presumptive taxation scheme have been increased from ₹2 crores to ₹3 crores to promote non-cash transactions and ease compliance for MSMEs and startups. 
   

  This increase will apply to MSMEs only when the aggregate of the amounts or amounts received in cash during the year do not exceed 5% of the total gross turnover/receipts (total revenue).
   

• Concessional Tax for New Manufacturing Cooperative Societies

  New cooperative societies established on or after April 1, 2023, that commence production or manufacture by March 01, 2024, can pay concessional tax at 15%. 
   

  This MSME tax exemption does not claim any specified deductions or incentives. It is subject to compliance with the terms and conditions given in the Rules.
   

• Relief for Carry Forward and Set Off of Losses for Startups

  The 2023 Budget proposes to amend Section 79 of the Income Tax Act to provide relief to startups by extending the loss carry forward on shareholding changes in startups from seven years to 10 years after incorporation.
   

  The minimum 51% continuity condition is relaxed and is waived from the carried forward losses for startups if all company shareholders continue to hold company shares. This amendment will be in effect from April 1, 2023, and will apply to the assessment years 2023-24 and onwards.
   

• Extension of Incorporation Period for Startups for Tax Exemption

  The period of incorporation for startups incorporated before April 1, 2023, is extended by one more year, i.e., April 1, 2024, for receiving tax benefits.
   

• Simplifying Amortisation Deduction Claims for Preliminary Expenses

  To simplify claiming the amortisation (the process of gradually writing off the initial cost of an asset) of certain preliminary expenses, the new Budget has proposed to remove the requirement of approval from the Board.
   

  The new format for reporting such expenses will be prescribed by the Government through an assessee. 
   

• Promotion of Timely Payments to MSMEs through Income Tax Act Amendment

  The new Budget has proposed to include payments to MSMEs under Section 43B(h) of the Income Tax Act 1961, to prompt timely payments. MSME tax deductions for these payments can be claimed only when the payments have been made. 
   

  It will be allowed on an accrual basis (transactions recorded in account books as they occur) only when the payment is made within the time prescribed under the MSME Development Act.

Other Initiatives and MSME Benefits to Promote Agri-Startups and MSMEs in Budget 2023

• Extension of the Credit Guarantee Scheme for MSMEs that will be effective from April 1, 2024, enabling an additional collateral-free guaranteed credit of ₹2 lakh crore. 
   

• MSME benefits from relief under Vivad Se Vishwas I for failure to execute contracts during the Covid period. The Government will return 95% of the forfeited amount.  
   

• Agriculture Accelerator Fund to Support Agri-Startups to increase profitability and productivity by introducing modern technologies. 
   

• Businesses can now use a Common Business Identifier (PAN).
   

• Digital Storage Solutions for MSMEs: Access To DigiLocker to securely share and store documents online.

Budget 2023 Tax Exemption Updates on Life Insurance Policies

The new Union Budget 2023 has amended the tax exemption rules regarding the tax exemption on life insurance maturity benefits to ensure that the rich do not misuse life insurance for investment.
 

As of April 1, 2023, the Indian Government has stated they will tax maturity benefits of life insurance policies if the total annual premium exceeds ₹5 lakhs on all policy purchases. The taxable amount will be the difference between the maturity amount and the premium amount paid over the policy term.
 

The premium can only be claimed as a deduction if the taxpayer/insured person has not claimed any tax deductions for their premiums payments during the policy's term.
 

This will not impact taxation on ULIPs#, which are taxable as capital gains if their annual premium exceeds ₹2.25 lakhs. This change will also not affect the tax exemption for payouts to nominees in case of the insured person's death. 
 

Lastly, life insurance policies that have been issued till March 31, 2023, will continue to remain tax-free. Contact us through our helpline to learn more about how this new amendment will affect your Tata AIA life insurance.

Conclusion

It is no secret that MSMEs contribute to a significant portion of India's GDP. By introducing new MSME tax benefits under Budget 2023, the Indian Government aims to encourage the growth of MSMEs and startups. These changes will also simplify MSME registration processes by amending certain sections under the Income Tax Act.
 

These changes will positively affect the MSMEs and startups, leading to the overall development of the country’s GDP and economic growth.