A plethora of operational activities in a startup can go haywire quickly if not properly handled properly. As a company, you can manage the deliverables, set costs and schedule the execution tasks. In an early period, tax consideration is resource-consuming, particularly when it includes GST registration, ITR, timely filing, etc. It’s also one of the aspects you can’t forget as a creator. Although profitability is the center of focus as the business starts, every penny saves as a penny. And one of the best ways to do this is to build your company tax strategy, much like how you would holistically manage your business operations.
This will allow you to build a hedge against potential losses while ensuring that you take advantage of the tax benefits.
Check out these 5 tax-saving tips that can help any startup to prepare filing income tax returns effectively.
#1 Know your business structure
It all starts with understanding your business framework and how it is subject to tax constraints as changing public tax policy will always change. It is also best to keep up with the company framework to see what it provides best. This lets you appreciate the privileges you possess as a taxpayer and leverages any future advantages such as a 100% exemption from income tax in the first three years, for example.
The only exception is to pay an alternative minimum tax of 18.5%. You may also claim an exemption as long as your business is approved under the Startup India program.
Many potential deductions also include Capital Gain Taxation, the SEBI Fund, and on the Angel Investments. As a startup founder, these rules must be understood and used to promote your company.
#2 Improve your tax knowledge
Tax planning requires that you have the right expertise. It is important to consider tax laws and how they impact business operations. The first step towards this understanding is, therefore, to learn about tax standards. Do this by learning about companies, and link to a blog by tax experts at your convenience.
Learn about applicable tax legislation and regulations before moving progressively to compliance. Understand that regulators oversee income tax and carry out stringent price controls. Try to identify the tax requirements of your company to get started.
If you are in the business of selling juices, for example, lemonade may also be considered as an aerated drink. Lemonade, if categorized as an aerated drink, is taxed at 28%, but is taxed at 12% if classified as pulp water. Thus, classification confusion can be taken as an advantage to save the output GST before clarification is obtained.
#3 Start documenting your deductions
Startups are eligible to deduct expenses for their “normal and necessary” operating costs.
- Business Travels
- Stationary expenses like buying like paper, pen, pads, etc.
- Rent and home office equipment (only parts pro-rated).
- Training materials and other company programs expenditures.
The only thing you can do is save receipts or documents if you make any business expenses. This shall help you when you file your income tax returns and remain applicable for the possible deductions if available.
#4 Choose a 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 founder, 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 or consult tax professionals
Recruiting corporate services providers is an insightful way to deal with corporate tax. You won’t need to worry about dull things such as GST returns, account records, etc. Roping with tax professionals ensures that the business meets all necessary criteria and ensures the smooth nitty-gritty operation. Your expertise will also assist you in making crucial business decisions.
Often all that your startup need is a proper tax advice and full tax-related compliance done for your business. It’s also an excellent way to plan an unforeseen contingencies for your company.
Though most startups are careful about taxation, some are still uncertain. That is because taxes have many sub-branches, which are a little too hard for entrepreneurs and take a lot of time. Moreover, reinventing the wheel is not a feasible option for individual businesses. Onboarding professionals would lower the departmental hierarchy and thus more operational costs if the company’s secretaries and chartered accountants were in-house.
Roping in an external team of tax consultants ensures fulfilling business compliance and helps to break down your corporate obligations. You can focus on core business transactions and keep regulatory issues at bay.