The early days of startups will involve a lot of operational commitments if not handled properly, things can quickly go haywire. Being a founder, you will be planning the deliverables, establishing setup costs and planning tasks for execution.
Thinking about tax in such an initial period is quite taxing, be it GST registration or filing ITR on time. As a startup founder, it is also one of the ever-present tasks that you cannot simply overlook.
While profits stand for sustainability when you start the business, consider every penny saves as a penny earned. And one of the best ways to do this is to plan your business taxation just as you strategize other business activities for devising a holistic approach.
This way, you will create an opportunity to create a cushion around possible losses – while availing possible tax benefits.
Check out these six quick tips if you are a startup and looking to plan your taxation early on in the business:
- Understanding Benefits and Rights as a Taxpaying Business
Your business may be vulnerable to tax regulations with any change in tax policies by the government. Therefore it is best to stay aware of your rights of being a business taxpayer and the benefits that it yields. E.g., A100% tax exemption on profit gains for the first three years.
The only exception to this is the Alternate Minimum Tax, which is 18.5%. If your startup is registered under the Startup India scheme, then it is your right to claim the exemption.
There are other possible exemptions like the ones on capital gain tax, Funds of Funds (SEBI), and negating the angel investment tax. As a founder, you must understand these and leverage such regulations to favour your business.
- Educate Yourself with Tax Knowledge
The key to tax planning is awareness. It is essential to know the legalities involved in taxation and how it affects business operations.
Therefore, the first step towards creating such knowledge is to learn about the tax norms. Do it by educating yourself on tax and refer to a few best startup resources at your convenience.
Start getting acquainted with applicable laws and provisions related to taxation before gradually moving towards staying compliant.
Understand that there are legal authorities who govern income tax and are responsible for running rigorous checks on businesses. Try identifying the tax norms that apply to your business.
For example; A lemonade may be considered under Aerated Drink as well us under the Pulp Juice category. Lemonade, if categorized as Aerated Drink, shall be taxed at 28%, but if categorized under Pulp Juice shall be taxed at 12%.
Thus, the ambiguity in classification may be taken as an advantage to save the Output GST unless some clarity is received from the department.
- Document your Possible Deductions
Startups have the right to get a deduction for their “ordinary and necessary” expenses that fall in line with their operations. Such expenses include;
- Travels for work
- Rent & utilities for home offices (only pro-rated portions)
- Books or magazines about your field
- Materials for industry training programs and other such expenses.Materials for industry training programs and other such expenses.
The only catch is that any expense you deduct needs receipts or documentation to back it up. For best results, save all of your receipts as you accumulate them. Then, while attending to your taxes, send them all to a company that will automatically scan and organizes the receipts for you online.
- Choose Business Structure Wisely
It is better to consider your business structure when starting a new business because each type will have different tax slab. Companies are bound to attract tax, and as a startup founder, you should aim to minimize the taxability.
E.g., the tax slab for sole proprietorship ranges from 5% to 30% over the basic exemption limit. The tax slab for Partnership Firms and LLP is flat in a way that every penny earned is taxed at 30. The tax slab for companies is 22% subject to certain conditions, which has also been bought down to 15% for new manufacturing companies.
Know partnership and LLP are treated in the same manner by tax authorities. Most of the promoters choose LLP over Private Company because of the Dividend Distribution Tax (DDT).
It is so because DDT is taxed on income distribution by a company which is applicable at a gross rate of 15%.
- File ITR on Time
People need to file income tax returns as per the directions of the IT department, and doing so on time can help you reap tax benefits. E.g., the ability to carry forward all the losses in business for eight consecutive years.
Also, you can set it off against the earned income for the coming years if not adjusted in the current financial year. All this is possible if you file your returns before the due dates.
Keep a good check on the changes in tax norms to ensure your business stays compliant. It means keeping a close watch on tax regimes and available tax write-offs that facilitates more savings for the long and short term.
- Hire/Consult Tax Professionals
Hiring business service professionals is an excellent way to deal with business taxation. For example, you will not have to worry about mundane tasks like GST returns filing, keeping books of accounts, etc.
Roping in tax professionals ensures your business meets all the necessary compliance and takes care of nitty-gritty involved in running it smoothly. Also, their expertise can come in handy to help you make crucial business decisions.
Sometimes, all your business requires is good advice from tax experts on tax planning and having complete control over tax-related compliance. Such a decision is also an excellent way to prepare your business to face any unforeseen contingencies.
While most of the startups are wary of the taxation, there is still a lack of clarity amongst some. This is because taxation has many sub-branches, which gets a little too complicated for founders and it also demands a lot of time.
Reinventing the wheel is also not a feasible option for some businesses as onboarding an in-house CS and CAs will lead to more in-house departmental and hence more operational cost.
Having an external team of tax professionals advising you not only ensures that your business stays compliant and leverages tax benefits – but it also helps reduce your operational responsibilities as a business. You can then focus on performing core business activities, keeping compliance worries at bay.