Your startup journey would include several organizational tasks, which, if not properly managed, can go haywire quickly. As an entrepreneur, you can schedule the deliverables, set up costs, and prepare the execution tasks. Thinking about tax in such an initial period is entirely consuming, especially when it involves GST registration, ITR, timely filing, etc. As a founder, it’s also one of the things you can’t always overlook. Although profitability takes center stage when you start the company, every penny saves as a penny gained. And one of the best ways to do that is to prepare your company tax strategy, just like how you’d plan your business practices with a holistic approach.
This would provide an incentive to create a buffer around future losses while ensuring you make use of the tax benefits.
Here are the five tax-saving tips that help startups and prepare them to plan and beneficially manage tax.
1. Knowing the rights and benefits of tax payments for your business structure
are subject to tax restrictions as changing government tax policies may change any time. It is, therefore, best to stay aware of Many businesses the rights you enjoy as a corporate taxpayer and leverage all possible advantages like getting a 100% benefit of an income tax deduction for the first three years, for example. The only exception is that you will need to pay a Minimum Alternative Tax of 18.5%. Also, as long as your company is licensed under the Startup India program, you can claim an exemption.
Many potential deductions also include Capital Gain Taxation, the SEBI Fund, and on the Angel Investments. As a founder, these rules must be understood and used to promote your company.
2. Enhancing your Tax Knowledge
Tax planning requires you to possess the right set of knowledge. Understanding the tax laws and how it affects business operations is essential. Therefore, the first step in developing such awareness is learning about tax standards. Do this by educating yourself on business, and at your convenience, refer to a blog by tax experts.
Start learning about applicable tax laws and regulations before gradually moving towards enforcement. Understand that there are regulatory bodies that regulate income tax and exercise strict market controls. Seek to define your business’ tax requirements to get started.
For example, Lemonade can also be considered under Aerated Drink in the Pulp Juice category. Lemonade, if categorized as Aerated Drink, is taxed at 28%, but if classified as Pulp Water, it is taxed at 12%. Thus, the uncertainty in classification can be taken as a benefit to save the Production GST until the department receives any clarification.
3. Document your Possible Deductions
Startups are entitled to a deduction for their “usual and required” expenses that relate to their operations.
• Books or magazines
• Job travel
• Training materials and other such expenses for business programs.
• Leasing and home office facilities (only pro-rated portions).
The only catch is that any expenditures that you subtract would require receipts or paperwork to save them. Save all your receipts as you collect them for the best performance. Instead, when you pay your fees, give them all to a company that scans and organizes your receipts electronically automatically.
4. Choose Business Structure Wisely
While creating a new company, understanding the business structure is best, as each form would have different tax slabs. Companies will raise the tax, and as a startup creator, you will strive to reduce taxability. E.g., the sole proprietorship tax slab varies from 5% to 30% above the standard exemption cap. The tax slab for Partnership Firms and businesses with LLP registration is taxed at a flat rate of 30%. The business tax rate is 22%, subject to some limitations, and has also been bought down to 15% for new manufacturing firms.
Tax authorities consider LLP and normal partnerships alike. With Dividend Distribution Tax (DDT), most promoters prefer LLP over the Private Sector. This is because DDT is paid on a company’s profit distribution at a gross rate of 15%.
5. Hire/Consult Tax Professionals
Hiring business management providers is a smart way to tackle company taxes. You won’t have to think about boring things like filing GST returns, holding account records, etc. Roping in tax professionals ensures the company meets all required requirements and takes care of the nitty-gritty involved in smooth running. Also, their experience will help you make important business decisions.
Often all your company needs are proper tax professional guidance on tax planning and full tax-related enforcement power. It’s also an excellent way to plan your company for any unexpected contingencies.
While most startups are cautious about taxes, some still lack clarification. It is because taxation has multiple sub-branches, which is a bit too difficult for entrepreneurs, and requires a lot of time. Also, reinventing the wheel is not a viable choice for some companies as onboarding, an in-house Company Secretaries and Chartered Accountants would result in more in-house departmental and thus more running costs.
By keeping an external team of tax experts advising you not only ensures that your company stays compliant and leverages tax advantages, but it also helps to plummet your company obligations. You can then concentrate on core business operations, keeping regulatory issues far out from your usual business matters.