MSME - Registration Benefits and Tax Benefits

1. Introduction

Micro, Small and Medium Enterprises are known as MSMEs. The benefits of MSME registration in India are many at both macro and micro levels. MSMEs provide country residents with the freedom to strike out on their own. In doing so, they contribute to society by generating new jobs and diversifying the gross domestic production of a region (GDP). By offering employment opportunities, access to loans, and other services to the various classes of societies, they have gradually and steadily revived both the rural and urban economy of India. Additionally, they continuously promote infrastructure improvement, technical advancement, and the nation's and society's modernisation.
Proportionally speaking, the MSME sector makes up an astounding 30% of the country's GDP, 45% of its manufacturing output, and more than 48% of its exports. The huge potential of the MSME Sector is also well recognised by the Government of India ("GOI") considering various initiatives over the last few years.

2.Udyam and Udyam registration:

The Government of India has notified a full system of Facilitation for the Registration Process of MSMEs, i.e. Udyam registration. As per the notification issued by GOI under the MSME Act, 2006, any person who intends to establish an MSME can apply online for a Udyam Registration Certificate ('URC"), which is also known as an MSME Registration Certificate at the Udyam registration digital portal.

Key features:

• For this procedure, the enterprise will be called as Udyam, and the registration process will be called 'Udyam Registration'
• A permanent registration unique number will be provided after the registration process
• Once the registration process is completed, an online certificate will be issued
• This certificate will feature a dynamic QR Code that users can scan to access the enterprise's details and web page on our Portal
• URC registration by MSMEs is mandatory for processing loan applications by lending institutions
• Renewal of Registration is not required
• Single window systems at Champions Control Rooms and DICs (District Industries Centers) will help applicants in the process
• Zero Registration Fee

W.e.f. 1st July 2020, enterprises are classified into micro, small or medium combinations of annual turnover and investment in Plant, Machinery & Equipment, which is shown in the table below:

3. Benefits of Udyam Registration to MSME:

MSMEs enjoy various Udyam registration benefits. Some of these important MSME registration benefits are enumerated below.

• Collateral - Free Bank Loans, including credit guarantee scheme introduced by the GOI, SIDBI and Ministry of MSME
• Access to International Trade – The GOI funds business delegates to attend international trade shows, exhibitions, business meetings and seminars/conferences held worldwide, which facilitate global exposure and expertise
• Reduced rate of interest on loans from banks – MSME registered businesses benefit from lower rates of interest as compared to other enterprises, which provides a competitive advantage
• Subsidy on Patent registration to continue developing novel ideas and technologies
• Protection against delayed payments – The MSME Act, 2006, provides that MSME payments be made within 15/45 days of invoice/billing, which provides a clear advantage of cash flow management
• MSME with registration qualifies for electricity bill concession
• Reimbursement of ISO certification
• Marketing and promotion assistance from GOI
• Technology upgradation support from GOI

All such benefits of Udyam registration for MSMEs are intended for the commercial and entrepreneurial growth of the MSME, which also augurs well for Indian economic growth.

4. Tax benefits for MSME:

As stated in the above para, MSME attracts top priority from GOI for its tremendous potential and the scope it offers for the economy as a whole. Listed below are some tax benefits for an MSME that further attract overall business proposition:

a. Deduction of Interest Expense: Interest on business loans availed by MSME for various purposes such as working capital, expansion or investment is a deductible expense u/s 36(1)(iii) of the Income Tax Act, 1961, while computing taxable income for income tax purpose. This reduction in taxable income can lead to a lower tax liability, thereby leading to potential tax savings for the business.

b. Increased Cost of Acquisition of Qualifying Asset: 'Qualifying Assets' are those requiring a substantial time for readiness. The interest on funds borrowed for such assets is capitalised, enhancing the acquisition cost. This offers tax advantages for MSMEs, enabling increased depreciation and potentially lowering capital gains upon asset sale under the Income Tax Act of 1961.

c. Other Tax Implications:
• Income tax deduction is available to MSME businesses under Section 80JJAA of the Income Tax Act in respect of generating an additional employment to prescribed new employees
• A tax holiday 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 for 5 years from the year of commencement of production.
• MSMEs can opt for a lower tax regime at a rate of 25% under Section 115BAA.
• The Goods and Services Tax (GST@) system offers the Composition Scheme to MSMEs with an annual revenue exceeding INR 1.5 crores
• If the MSME invests its capital gains from the sale of a long-term asset in the equity shares of a qualified startup, Section 54GB exempts it from capital gains tax
• MSMEs that invest in plant and machinery/equipment can claim an investment allowance of 15% under Section 32AC.
• MSMEs can maximise tax benefits by deducting legitimate business expenses like rent, salaries, depreciation (including additional depreciation) and other administrative expenses.
• The Startup India initiative offers a range of tax benefits to startups operating in the MSME sector. These advantages could include exclusions from capital gains tax on investments made by qualified investors and an income tax vacation for a predetermined period of years.
• Under section 44AD, eligible MSMEs can choose the Presumptive Taxation Scheme. This relieves MSMEs of the need to keep thorough books of accounts, lessening compliance stress and may result in a lower tax liability. The Finance Act 2023 had increased the threshold limit from INR 2 crore to INR 3 crore for ease of compliance of MSME
• Finance Act of 2023 introduced Section 43B(h) to promote timely payment to MSMEs. Tax deductions for payments made to MSMEs can be claimed only when the payments have been made within the time prescribed under the MSME Development Act. This will improve the working capital of the MSMEs.