Budget 2024 expectations: Professionals should also be given the option to switch tax regime every year
Individual and HUF taxpayers have the option of choosing between the old and the new tax regime on an year-on-year basis. However, a person deriving income from business or profession who has opted out of the prevalent new tax regime u/s 115 BAC can exercise the option of returning to the new tax regime only once. This restriction on switching of the tax regime is a handicap for diligent and compliant professionals. It is expected that the Union Budget 2024 would provide flexibility for professionals to switch between the old and new tax regimes on an yearly basis.
Budget 2024 expectations: Reduction in income tax rate for partnership firms and LLPs with small businesses
Professionals and small businesses are often incorporated as partnership firms or LLPs as compared to corporates due to ease of formation, low cost of operation, reduced compliance burden etc.. As per the present law, partnership firms and LLPs are taxed at flat 30% (plus applicable surcharge and cess) resulting in an effective tax rate of 34.94% in most cases. However, those businesses set up and operating as private limited companies are given the benefit of reduced effective tax rates such as 25.17% or 17.16%, subject to fulfillment of certain conditions.
A significant percentage of small and medium businesses operate either as partnership firms or LLPs and pay tax at a much higher rate. Further, they do not have any option to pay tax at a concessional rate. Thus, in order to promote entrepreneurship and economic growth , there is a need to reduce tax rates for partnership firms and LLPs. Alternatively, introduction of a concessional regime for partnership firms and LLPs having turnover up to a certain limit can be considered in Budget 2024 so as to bring them at par with the corporates.
Budget 2024 expectations: Rationalisation of TDS rates for start-ups, small businesses
Certain sections of the Income Tax Act provide a nominal TDS rate (for instance, Section 194C – applicable for contracts imposes a TDS rate @ 1%/2% depending upon the nature of tax deductee whereas section 194H- applicable for commissions imposes a TDS rate of 5%) whereas the TDS rates in certain other sections (Section 194J – applicable to professional services) is 10%.Subjecting small businesses and start-ups to withholding requirements restricts their liquidity which is a vital factor for smooth functioning of the business. Thus, it is expected that these TDS rates will be rationalized and reduced from 10% to 5% under section 194J.
Budget 2024 expectations: To address issue of non-grant of full TDS credit appearing in Form 26AS
As per the existing income tax return (ITR) processing mechanism, small businesses and professionals are not granted full TDS credit appearing in Form 26AS in cases where the income offered in the ITR form (as per books) is lower than that reflecting in Form 26AS.It is important to note that the receipts as appearing in Form 26AS may be pertaining to income already offered to tax in preceding financial years or may be receipt of advance income and appearing in current year’s Form 26AS due to difference in method of accounting followed by the deductor and the taxpayer.
The result is non-grant of TDS credit to the taxpayer either in the preceding financial year in which income has been offered (as TDS credit does not appear in Form 26AS for that financial year) or in the subsequent year in which it is appearing in Form 26AS (as the income as per books is lower than gross receipts appearing in Form 26AS), resulting in loss of TDS credit to the taxpayer.
Therefore, in such cases, it is recommended that the government modifies the ITR processing mechanism procedure to allow TDS credit in the year in which it is appearing in Form 26AS even if gross receipts as per Form 26AS are higher than income as offered in the ITR.