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Tax Planning for New Businesses: A Comprehensive Guide

Updated: Jul 1

Tax Planning for New Businesses: A Comprehensive Guide

For individuals, taxes can be a little perplexing, but for businesses, well, let's just say there's an entirely new level of complexity. It's challenging to run a business on its own. In addition to managing several obligations, one must also deal with taxes. Undoubtedly, it can give one a headache. Now, efficiency is essential if you want your new firm to take off and expand. Every rupee you save matters, which is why tax planning is important. You can make the most of the available tax deductions and exemptions under the Income Tax Act with the help of professional tax planning services. For new enterprises in particular, this is crucial because saved money may be used to support business growth. So let's define tax planning for new businesses and discuss its significance in this blog. We'll also examine a few tax planning techniques that can support the success of your startup.

 

Table of Contents

 

What is Tax Planning for Businesses?

Tax liabilities are something that everyone strives to minimise, and businesses are no exception. The practice of organising a business's finances to ensure that it must pay the least amount of tax feasible is known as tax planning. To strategically optimise the entire tax burden, this architecture entails evaluating the expenses, profits, operations, investments, assets, liabilities, and other variables. Businesses are critical to the development of a nation. They both generate employment and advance the economy. The government acknowledges their significance and offers tax breaks and other incentives to promote the expansion of businesses.


Importance of Tax Planning for New Businesses

Businesses can make use of a number of provisions under the Income Tax Act, including preferential tax treatment for specific types of income, incentives for exports, and deductions for capital investments. For new firms, starting tax preparation early is the best course of action. The first few years and months are crucial, because taxes can significantly affect a company's profitability. Here are a few reasons new businesses should consider tax planning: 

  • Tax planning ensures that your company continues to comply with the law. The burden of interacting with the income tax department should be the last thing you need when managing a business.

  • It lowers costs, which boosts profitability—a crucial factor in the early years of any startup—as new companies frequently seek investors to propel their expansion. 

  • Startups can attract more investors if they have a sound tax plan since investors pay close attention to how a company handles its taxes. Investors are inclined to view a company as a fantastic prospect if they think the company is managing its money well. 

  • Additionally, tax preparation increases a company's efficiency. They may devote more funds to initiatives like product development, marketing, and expansion by reducing their tax burden. 

  • A company that invests in R&D may be eligible for certain tax incentives. This helps firms save taxes while also encouraging innovation and long-term growth. 

Startups require special care and attention in their early years because they could make or ruin them. For this reason, tax planning is essential for companies at this point since it allows them to follow the rules while still reaping the rewards. Early tax planning might be one of the best moves one can make, as it guarantees business sustainability and easy sailing. 


Tax Planning Strategies for New Businesses

Now that you understand the why of tax planning for your new business, you must also comprehend how you can do it. Here are a few smart strategies startups can adopt for effective tax planning:


Select an Appropriate Business Structure 

There are various tax ramifications for different business structures. For instance, when a business is operated as a sole proprietorship, the owner is responsible for all taxes payable personally. In contrast, each partner in a partnership is responsible for their portion of taxes. If you choose to form a corporation, you may be subject to double taxation, which entails paying taxes on both your earnings from dividends as a shareholder and the corporation's tax. A firm can adopt a variety of forms, including One Person Companies (OPC), Private Limited Companies, and Limited Liability Partnerships (LLPs). You must comprehend the tax ramifications of each structure as well as how it operates.


Stay Ahead of Documentation and Record-Keeping

Keeping tabs on all of a business's expenses is crucial because there are several of them. Similar to this, it's critical to maintain precise records of your earnings, invoices, and receipts. Keeping thorough financial records will assist you in managing your overall financial health as well as in claiming tax deductions. This paperwork can help you claim the appropriate deductions and streamline the tax filing procedure.


Claim Permissible Deductions and Tax Credits

The Income Tax Act offers numerous deductions that are advantageous to small businesses. These deductions encourage investment, adherence to rules, and the nation's economic expansion. Understanding the tax code thoroughly is necessary to determine whether deductions are applicable to your organisation. The following are some advantages that the IT Act offers to startups: 

  • A 3-year tax holiday is available to any startup that registers or incorporates between April 1, 2016, and March 31, 2022. These startups are eligible for a three-year, seven-year block of 100% tax exemption on their profits. In a financial year, the company's total revenue cannot exceed Rs. 25 crores. One of the most challenging things about launching a business is having little money to operate it. A three-year tax vacation makes it easier for startups to get established in the industry.

  • A new section 54EE was implemented by the government to exempt long-term capital gains from taxation. According to this clause, all qualified startups can claim an exemption from long-term capital gains tax as long as they invest their earnings within six months of the transfer date in a fund designated by the federal government. A maximum of Rs. 50 lakhs can be invested, and the money must be held in the fund for three years. Should the funds be removed prior to the three-year mark, the exemption will be lost.

  • According to Section 54GB of the Income Tax Act, an individual or HUF is not required to pay long-term capital gains if they sell a residential property and utilise the proceeds to invest in SMEs or buy 50% or more of shares in startups that meet the eligibility requirements. The exemption, nevertheless, will only be granted if the shares are held for five years following the date of acquisition. In addition, the startups are required to use the invested funds to buy assets and refrain from selling or transferring them before a period of five years has passed.

  • For entrepreneurs, there is no tax on investments over fair market value. These contributions come from individuals and funds that aren't officially recognised as venture capital (VC) funds, as well as from angel investors and incubators. To put it plainly, tax exemptions apply to investments made by angel investors that exceed the company's fair worth. This makes it easier for companies to raise more funds to operate.

  • A company may carry forward its losses under section 79 of the Income Tax Act if the following conditions are met: the loss must have been incurred over the course of seven years following the company's incorporation; the shareholders who had voting power in the year the loss was incurred must still be in possession of their shares on March 31, the year the loss is to be carried forward.


Eligibility for Startup Exemptions

A startup is a brand-new company founded with the intention of marketing a single good or service that the founders feel there is a market for. However, a startup needs to meet the following requirements in order to be eligible for tax advantages and other government programmes: 

  • The age of the company ought to be under ten years. In other words, the company's incorporation/registration date cannot have been more than ten years ago. 

  • To be eligible for startup-related advantages, the company must be registered as a partnership firm, limited liability partnership, or private limited company.

  • Any year following incorporation, the yearly turnover of the business cannot surpass ₹100 crores.

  • The startup should be actively trying to innovate and develop new goods and services.

  • It is not appropriate to create a new business by reconstructing an already-existing one.


Plan Early and Pay on Time

Although it may seem laborious, tax planning every three months has some benefits. This will offer you time for modifications and compel you to evaluate your financial performance on a frequent basis. Since nobody enjoys dealing with last-minute tax-related stress, regular tax planning also helps you estimate your annual tax bill precisely and lessens your effort during the hectic tax season. When you file your income tax returns or complete your GST filing in compliance with government laws by the deadlines, you can reduce late costs and maximise tax savings for your business. 


Seek Professional Guidance

Tax preparation is only one of the many business-related tasks that an owner of a company is best off handling with expert assistance. A certified tax planner is someone with years of expertise who has a deeper understanding of the tax system than the average person. They can help you take advantage of tax-saving possibilities when they present themselves, navigate the numerous tax rules, and keep you informed of any changes. You may concentrate on expanding and developing your new firm during the critical early stages when a tax planner takes care of your tax requirements, freeing you up to handle other pressing matters.


Conclusion

Now that you are aware of the advantages of tax planning and the methods you can use to reduce your tax obligations, you can make an informed decision. Even though you can handle taxes on your own, a tax advisor might prove to be a valuable partner in your company's endeavours. The expenses of running a small business undoubtedly mount up. Tax planners are sometimes viewed by business owners as merely another expense, but this is completely false. You have to consider hiring a tax planner to be an investment. Their professional advice and insights have the power to really grow your company.


FAQ

Q1. What is the role of tax planning play in setting up a new business?

Tax planning is essential for new companies wishing to start in India. The effects of the pandemic and growing market competitiveness have made this more important. Establishment staff and entrepreneurs can better accomplish their financial goals with the help of tax preparation for their new venture. A business needs to maintain a positive cash flow in addition to having to invest a sizeable amount of capital to stay in operation. 


Q2. Do startups need to file ITR?

It is mandatory for all companies to file the ITR, regardless of whether the company conducted any activity during the relevant fiscal year.


Q3. Are startups exempted from GST?

If a startup's annual sales are below the threshold of Rs. 40 lakhs for goods and Rs. 20 lakhs for services, or if the startup is engaged in the supply of exempt products or services, it is not subject to GST.


Q4. What is the tax holiday for startups?

Startups in India with recognition from the Department for Promotion of Industry and Internal Trade (DPIIT) might potentially save thousands or even millions in taxes. Recognised startups are eligible for a 100% tax exemption under Section 80 IAC of the Income Tax Act.


Q5. What is the tax rate for startup companies in India?

Under Section 115BAB of the Income Tax Act, 1961, new domestic businesses manufacturing or producing goods in India are eligible to seek a concessional tax rate of 15%.


Q6. What is the tax benefit for a new company?

For the first three years of the ten years starting in the year the start-up is formed, there will be a 100% deduction of the profits made by such a business.


Q7. What is the startup India scheme?

The Government of India's flagship programme, Startup India, aims to foster a startup culture and create a robust, inclusive environment that supports innovation and entrepreneurship in the country.



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