Intricate relation between Taxes and business loan
Date : 18.June.2018MSMEs are the power engines of the economy. Micro, Small and Medium Enterprise (MSMEs) constitute majority percent of total enterprises in most of the economies and are credited with generating highest rate of employment growth and also account for a major share of industrial production and exports. In the Indian context they can be considered as the backbone of national economy. A catalyst for socio-economic transformation of the country, the sector is critical in meeting the national objectives of generating employment, reducing poverty, and discouraging rural-urban migration. These enterprises help to build a thriving entrepreneurial eco-system, in addition to promoting the use of indigenous technologies.
For any business to take off adequate investment is required and most banks have very stringent checks and processes before approving a loan application. More often than not, loan application of an MSME entrepreneur is rejected due to multiple reasons like lack of hard collateral, properly documented feasbility of a business plan, long vinatage of healthy banking transactions, strong audited financials and so and so forth.
As a consequence, Indian Micro, Small and Medium Enterprise (MSME) sector suffers from dearth of easy finances and proper credit instruments. Furthermore, banks mostly offer credit against a collateral, and MSMEs, particularly micro and small units, are not in a position to do so, depriving them of access to the formal credit. Futhermore, essentially what happens in a typical Indian scenario is this "He is poor, his neighbour is poor. How do they manage? They borrow from each other." I read the above lines during my college days and I still remember and like it. It fully explains the importance of borrowing for all of us. Most of us must have borrowed at some point in life whether it is friendly borrowings from friends and relatives. It also throws a light on a traditional indian man's borrowing tendancy. He is quite apprehensive in approaching banks/NBFCs for a loan and would traditionally, prefer to take it from his neighbour or friend.
Sensing this void, GOI launched several schemes which can give the required boost to these MSMEs. Like, Credit Guarantee Fund Trust Scheme, Pradhan Mantri Mudra Yojana. (Read more at our blog: Advent of quick and easy business loans at www.prestloans.com).
Business owners enjoy several benefits when they opt for an institutional loan. The money may be used for various purposes, such as working capital, inventory and equipment. Borrowers also have flexibility in repaying the loan as per cash flow to ensure that there is no stress while servicing the borrowed amount.
The loan repayment affects the monthly and annual expenditure of the business. One lesser-known beneficial aspect of such loans is the tax deduction. Here are some basic tax benefits of a business financial arrangement:
Tax benefits under business loans
· Understanding Interest - The business loan interest is the additional amount that the borrowers need to pay for borrowing the money. It is a fee paid to the lenders for allowing the usage of the funds.
· Understanding tax deductible expenses - These are necessary and ordinary expenses that are beneficial for businesses to generate income. The deductible expenditures may be subtracted from the revenues before arriving at the tax liability. In other words, these expenses may be reduced from the gross revenue to lower the taxable income. The interest paid on the loan availed for the business is deductible, which helps lower the taxes for the company. You are advised by the tax authorities in India to maintain well-documented accounts of these payments as proof if such need arises in the future.
· Deducting the business finance tax - Yes, it’s true. Interest on business finance tax is deductible. Those companies that avail business finance are given benefits by tax authorities. Under this, the interest paid on borrowed amount is subtracted from the gross income. The promoters of the company maintain proper accounts of this payment which will serve as a proof in future if any need arises.
One important thing to consider is that the repayment amount is not tax deductible. This is because principal repayment means to pay back the money borrowed. The amount that you borrowed is not an income for business but an expense. This is the amount which is not earned which is why this amount is not tax deductible. Failure to repay the borrowed amount will lead to severe consequences. Therefore, every business must assess the situation first and then make a decision, whether or not they want to take a business loan.
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