Budget 2025: MSMEs and Professionals Expect 5 Key Income Tax Reliefs

Micro, Small & Medium Enterprises (MSMEs) and professionals play a significant role in India's economic growth. As of January 2025, 5.84 crore MSMEs are registered on the Udyam portal, reflecting their strong presence in the economy. However, the sector faces multiple tax burdens, compliance challenges, and cash flow issues that hinder growth.

In Budget 2025, small businesses and professionals expect income tax relief measures to reduce financial stress and simplify taxation policies. Key expectations from the government include lower tax rates for partnership firms and LLPs, rationalization of TDS rates, full TDS credit availability, flexibility in MSME payments, and presumptive taxation benefits for LLPs.

Key Tax Reliefs Expected in Budget 2025

1. Reduced Tax Rates for Partnership Firms and LLPs
2. Lower TDS Rates for Startups and Small Businesses
3. Full TDS Credit for MSMEs and Professionals
4. Extended Payment Timeline for MSMEs (Up to 90 Days)
5. Presumptive Taxation Benefits for LLPs

These reforms aim to boost ease of doing business, improve cash flow, and enhance tax compliance. Let’s explore each expected change in detail.

1. Reduced Tax Rates for Partnership Firms and LLPs

Current Tax Structure

• Partnership Firms and LLPs currently pay a flat 30% tax, plus surcharge and cess, leading to a maximum effective tax rate of 34.94%.
• In contrast, Private Limited Companies enjoy a lower tax rate of 25.17% or 17.16% under concessional tax regimes.

Proposed Tax Relief in Budget 2025

• To promote entrepreneurship and economic growth, the government may introduce a reduced tax rate for partnership firms and LLPs.
• A special concessional tax regime at 22% (plus applicable surcharge and cess) can bring these businesses at par with corporates.

Potential Benefits

• Encourages more small businesses to register as LLPs or partnership firms.
• Reduces tax liability, allowing firms to reinvest in business expansion.
• Supports the government's goal of achieving a $7 trillion economy by 2030.

2. Lower TDS Rates for Startups and Small Businesses

Current Issues with TDS Rates

• Different sections of the Income Tax Act impose varying TDS rates, impacting liquidity for startups and small businesses.
• Section 194J (Professional Services) imposes 10% TDS, significantly higher than 1%-2% under Sections 194C (Contracts) and 194H (Commission).
• The newly introduced Section 194T also mandates 10% TDS on payments to partners, creating cash flow issues.

Expected TDS Reforms in Budget 2025

• Reduce TDS under Section 194J from 10% to 5% for professional services.
• Revise Section 194T to impose only 2% TDS on partner payments instead of 10%.
• Withdraw Section 194T entirely and instead track payments via the Annual Information Statement (AIS).

Potential Benefits

• Improves cash flow for small businesses and startups.
• Eases financial burden, ensuring smoother business operations.
• Encourages entrepreneurship by reducing compliance complexities.

3. Full TDS Credit for MSMEs and Professionals

Current Challenges in TDS Credit Availability

• MSMEs and professionals often fail to receive full TDS credit due to income mismatches in Form 26AS and ITR filings.
• Reasons for mismatched income reporting:
  • Receipts credited in Form 26AS but accounted in different financial years.
  • Advance income and deferred revenue recognition cause discrepancies.
• This results in loss of TDS credit, leading to unnecessary tax disputes.

Proposed Solution in Budget 2025

• Modify ITR processing mechanism to allow full TDS credit in the financial year it appears in Form 26AS, regardless of income mismatches.

Potential Benefits

• Prevents unjustified tax outflows for small businesses.
• Ensures better cash flow management and reduced compliance burden.
• Improves transparency and efficiency in tax processing.

4. Extended Payment Timeline for MSMEs (Up to 90 Days)

Current Issues with Section 43B(h)

• Budget 2023 introduced Section 43B(h), requiring businesses to settle MSME payments within 15 or 45 days, failing which deductions are disallowed.
• Challenges for businesses:
  • Many industries follow a credit period of 90-120 days.
  • Large enterprises struggle with rigid short-term payment deadlines.

Expected Changes in Budget 2025

• Extend the payment deadline to 90 days to balance MSME payments and corporate cash flow.
• Modify compliance norms to accommodate industry-specific credit cycles.

Potential Benefits

• Reduces payment delays without disrupting corporate operations.
• Encourages fair business practices while maintaining financial flexibility.
• Supports seamless MSME cash flow, minimizing business disruptions.

5. Presumptive Taxation Benefits for LLPs

Current Limitations

• Presumptive taxation (Sections 44AD and 44ADA) applies only to:
  • Individuals, HUFs, and normal partnership firms.
  • LLPs (Limited Liability Partnerships) are excluded, despite being treated at par with partnership firms.
• This increases compliance burdens on LLPs, despite their small-scale operations.

Proposed Change in Budget 2025

• Extend presumptive taxation benefits to LLPs under Sections 44AD and 44ADA.
• Simplify tax compliance and reduce administrative complexities for LLPs.

Potential Benefits

• Encourages LLP registrations, fostering MSME growth.
• Reduces tax compliance burden, saving time and operational costs.
• Improves ease of doing business, promoting India's startup ecosystem.