6 Tax Planning Strategies for New Businesses

Every Indian individual, LLPs, HUF, partnership firms, corporates, AOPs, BOIs, and the likewise are obligated to pay taxes on time. 

Payment of taxes is counter-intuitive. On one hand, it reduces the take-home income  as well as keeps control of the standard of living, especially on the expenses. On the other hand, it also helps the government finance its various initiatives and programmes for the people of the state. Suppose you have opened a new business in India.

In that case, it is all the more important to do tax planning for your new business thoroughly so that you reap the maximum benefits of the available tax deductions and exemptions. Before you establish and dive into your new business and its operations, it is essential as an entrepreneur to gain some clarity on tax planning. Read on to know about aspects that you should factor in if you are planning to or have just set up a new business. 

Tax Planning 

As mentioned, with taxes being a liability for every individual, paying taxes on time becomes critical for getting the maximum deductions. If you have started a new business in India, tax planning for business becomes essential  as it will help you save significant financial resources in a way that is not only judicious and allowed but is promoted by the tax authorities themselves. 

New businesses are essential for the growth, progress, and development of the country. These new businesses create further income, employment, investments, and optimal use of resources. Thus, it is equally important that these new businesses are well supported and guided. The Income Tax Act, 1961, which governs the tax rules and regulations of the country, has several such options in the form of investments, deductible expenses, turnover particulars, and many more, which can help businesses save tax while simultaneously contributing to the growth and development of the economy. 

Expert recommended advice for Businesses, especially the newer ones, is to tap into the benefits of the available tax-saving option for saving financial resources during the initial period of the business. New businesses should take extra care in planning their taxes. Tax planning should ideally start from the moment a business is established.

Let us discuss in detail the meaning, significance, and various ways in which a new business can plan taxes for efficient and optimal tax savings.

Also Read: VPF Interest Rate – Voluntary Provident Fund Calculation

Understanding tax planning for businesses

Understanding tax planning for businesses is highly important as it is a critical part of financial management. Tax planning means using your resources cleverly such that the tax liability is reduced. It is systematic and strategic planning of the expenses, investments, operations, and other aspects with the purpose of reducing or minimising the tax incidence of the business.

Tax planning for businesses in India would enable the business to undergo a reduction of tax liability by utilising exemptions, tax benefits, and multiple forms of tax deductions. It is basically a financial analysis curated from the perspective of taxation. 

Significance of Tax Planning in Business

If the fresh businesses or startups do not take enough care towards proper tax planning and/or pay less or no taxes to the Government of India, then the growth and development of the country gets adversely affected. The government encounters a shortfall in finances and this takes a fresh toll on the citizens. 

On the other hand, strategic tax planning that makes the best use of financial resources and minimises the tax liability of the company through various types of deductions, exemptions, investments, and benefits provides financial leverage to the business as well as the government. 

• A systematic tax planning ensures the smooth functioning of the business.
• Tax planning keeps the business guarded against legal mandates and hassles.
• A business can significantly reduce its tax liability using a robust tax planning strategy.The money saved on taxes could be utilised for staggering investments.
• To put it simply, tax planning helps businesses save money. At the onset of a new business, these savings can be beneficial.
• Tax planning will help businesses optimally utilise the tax credits and concessions. 

These are some of the basic advantages of tax planning for new businesses. Thus, strategic tax planning for new businesses in India helps the organisation achieve a positive ROI. Therefore, all the stakeholders of the business are also satisfied. 

Next, we will discuss some strategies surrounding tax planning that new businesses can engage in so that they can get the benefits of tax planning.

6 Tax Planning Strategies for New Businesses 

If you are a new business in India and you wish to implement effective tax planning for companies in India, the following six strategies will help you a lot. 

Choosing the right business structure 

According to the Ministry of Corporate Affairs, there are different types of business entities that operate in India. For example, OPC, Pvt. Ltd., LLP, Sole Proprietorship, etc. Selecting the right business structure will help you reduce your tax liabilities and strengthen your tax planning strategies. In this way, choosing and understanding the tax liability of the  business structure will help you implement effective tax planning for new businesses.

Write off initial expenses

When you start your entrepreneurial journey, there will be several associated costs with setting up the business. These initial expenditures fall under the category of ‘capital expenditure’. The capital expenditure incurred for setting up a new business can be written off as a deduction in the first 5 years, in 5 instalments, as per Section 35D of the Income Tax Act, 1961.  Under Section 35D, the maximum deductible cannot exceed 5% of the project cost. An organisation’s maximum deduction cannot exceed 5% of the cost of the project or its capital invested in the business of the company.

Plan investments

Do not wait for the end of the assessment year to seep in for you to start thinking about tax-saving investments such as ELSS, PPF, tax-saver FDs, etc. Rather, check, research, plan, and stagger your investments regularly throughout the relevant financial year. This way, when you file your ITR, you will be eligible for a wide range of tax deductions and exemptions.

Claiming all possible deductions 

If you are a startup and just starting as an entrepreneur, you should see to it that all your books tally and you take advantage of all deductions possible. For example, apart from claiming the deduction of the preliminary expense in accordance with section 35D of the Income Tax Act, you can also get several deductions and exemptions as outlined in Chapter VI of the Income Tax Act, based on your investments and expenses. 

If you are tax planning for business in India and you declare your home to be your office, you are eligible to claim a Home Office Deduction by subtracting the relevant expenses like depreciation, electricity bills, property bills, business expenses, etc., but if you sell off the property, you might have to let go of long term capital gains tax under section 54 or 54F. 

Similarly, you can claim deductions like business expenses, which are incurred while running your business, and charitable donations, which attract deductions under section 80G of the Income Tax Act. 

Paying municipal taxes by cheque 

Payment of municipal taxes on your office premises by cash can  result in the loss of receipts. On the other hand, paying municipal taxes by cheque allows you to claim a deduction. Pro tip – if you have still paid by cash and lost the receipt, print the consolidated bank statement and show that there has been a payment of municipal tax. 

Diligently record cash expenses 

Although startups are flourishing in India, many of them are working in the unorganised sector where the labourers get paid in cash. Such indirect wages account for at least 40% of your functional expenses. For example, proper tax planning for business can never be implemented if in a company at least INR 50K is paid, which is not recorded or improperly recorded due to the absence of a proper register.

This results in the under-recording of expenses in a financial year by INR 180K – amounting to a flat tax rate of 30%. Keeping proper cash receipts along with signatures and thumb impressions of labourers is essential for claiming proper deductions from wages and ensures tax planning for companies in India. 

Conclusion

In addition to the above, there are some other strategies as well. These consist of deducting tax at source. Then one can avail of a deduction for depreciation as well. Under the Income Tax Act of 35AD, if a piece of new machinery is installed in a manufacturing company, there is a provision for additional tax exemptions.

In the case where new machinery is installed in a manufacturing enterprise, in addition to the depreciation, an additional tax deduction of 20% is eligible for the machinery unit if it is put to use in the same year. 

Furthermore, deducting income that is taxable under other heads or “income from other sources such as indirect income” is another strategy that new businesses can tap into. They can also claim indexation and report foreign assets, if any, – these are some of the strategies that would help in appropriate tax planning for companies in India.

Hiring the services of an expert, paying taxes in advance, investing in PPF, and various forms of insurance premiums also help in tax deductions for companies in India. 

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