What are the Tax Benefits for Small Enterprises?

Small-scale industries are characterized by their small and shy resources/ capital. These make them sensitive. In the beginning, small industries have to incur more expenses, but the returns are either nil or nominal. Therefore, they need to be provided support and assistance to tide over the crucial initial stage to enable them to survive. Hence, the government has come forward with various benefits to offers to small-scale industries in the country. One way to support the development of small-scale industries by the government is to provide the tax benefits. The government either exempts them from tax or provides them a concession in tax liability. This helps small industries accumulate capital, on the one hand, and plough back profits in business, on the other. The various tax benefits available to small-scale industries are now enumerated and discussed ane by one.
Tax Holiday: Under section 80J of the Income Tax Act, 1961, new industrial undertakings, including small-scale industries, are exempted from the payment of income-tax on their profits subject to a maximum of 6% per annum of their capital employed. This exemption in tax is allowed for a period of five years from the commencement of production. A small-scale industry has to satisfy the following two conditions to avail of this tax exemption facility.
i) The unit should not have been formed by the splitting or reconstitution of an existing unit.
ii) The unit should employ 10 or more workers in a manufacturing process with power or at least 20 workers power.
Depreciation: Under section 32 of the income tax Act, 1961, a small-scale industry is entitled to a deducted on depreciation account on the block of assets at the prescribed rate. In the case of small-scale industry, deduction from the actual cost of plant and machinery is allowed subject to a maximum of Rs. 20 Lakhs. The amount of depreciation is calculated on the diminishing balance method. In the case of an asset acquired before the accounting period, depreciation is calculated on its written down value. For plant and machinery that are used in manufacturing in the double triple shift, an additional allowance called Extra shift Allowance is available.
Rehabilitation Allowance: A rehabilitation allowance granted to small-scale industries under section 33-B of the income tax Act, 1961 whose business is discontinued on account of the following reasons.
i) Flood, typhoon, hurricane, cyclone, earthquake, or other natural upheavals.
ii) Riot or evil disturbance;
iii) Accidental fire or explosion; and
iv) Action by an enemy or action taken in combating an enemy.
Investment Allowance: The investment allowance was introduced way back in 1976 to replace the initial depreciation allowance. The investment allowance under section 31A of the income tax Act 1961 is allowed at the rate of 25 percent of the acquisition of new plant or machinery installed.
A small-scale industry can avail of investment allowance provide it has put to use machinery or plant either in the year of installation or in the immediately following year failing which the benefit will be forfeited.
Expenditure on Scientific research: Under section 35 of the income tax Act 1961, the following deductions in respect of expenditure on scientific research are allowed.
i) Any revenue expenditure incurred on scientific research related to the business of the assesse in the previous year.
ii) Any sum paid to a scientific research association or a university, college, institution or to a public company which has as its object, the undertaking of scientific research.
iii) Any capital expenditure incurred on scientific research related to the business of the assessee
Amortization of certain preliminary expenses: The Indian companies and resident persons, under section 35D of the income tax Act, 1961, are allowed to write off the preliminary and development expenses incurred by them in connection with the setting up of a new industrial unit or expansion of an existing industrials unit. The example of preliminary expenses is:
i) Expenses incurred in connection with the preparation of a feasibility report necessary for their business;
ii) Engineering expenses related to the business; and
iii) Legal charges if any for drafting agreements.
A small-scale unit established in a backward area, under section 80-HH, is allowed a deduction of 20 percent on its profits and gains provided the unit satisfies the following conditions.
i) The unit began its production after 31st December 1970 in any backward area of the country;
ii) It is the newly-established unit in a backward area. It is neither spilled nor reconstituted out of a business already in existence in any backward area;
iii) It has not been formed by the transfer to a new business plant or machinery which was previously used by the transfer to a new business plant or machinery which was previously used for any purpose in any backward area; and
iv) It employs 10 or more workers in a manufacturing process with power or 20 or more workers without power.


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