Startups & SMEs enhance your cash liquidity
One assumption among businesses is that taxation laws are very stringent and harsh on day-to-day business. A major concern of such businesses is cash-flow management; and if they belong to the B2B service industry, then deduction of tax at source (TDS) is a big hit to them. But the Government has provided concessional benefits to business entities with losses or inadequate profits. One of these benefits is a lesser known and rarely adopted, which can improve both cash liquidity and build working capital for your business; the Lower Deduction Certificate (LDC).
If yours is a services business and majority of your clientele belongs to the business category, then 10% of their payables will be withheld as TDS and will be deposited into your PAN by them. This will result in tax refunds if your business is having low profits; and the effect is worse with total TDS as tax refunds when you are running into losses. It takes around 6-18 months after tax filings to get refunds in your bank account. The best way to offset the effect of this is through the Lower Deduction Certificate.
You can apply for a LDC with the tax authority u/s.197 of the Income Tax Act, 1961; after which the authority assesses your provisional financials and determines your tax liability for the year. If your potential tax deduction is significantly higher than your expected tax liability then you are being allotted LDC at a very nominal rate of deduction. For e.g. If the Authorized Officer issues LDC @ 0.5%, then you can notify your clients to deduct tax to the tune of only 0.5% of the invoice value; instead of the usual rate of 10%.
Hence, B2B business should review budgets, projected turnovers for the months and the financial year to know the extra amount that can be infused into the business with this tool. Effectiveness of this certificate might be different for different businesses. It does take a few weeks and some documents to be submitted, but getting the LDC might prove worthy for your business.