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by Rajen Kumar

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Apr 2012

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Features

'What the Union Budget means for India's SMEs'?

Jul 2009

MSMEs struggling with slowdown have something to cheer about. The Union Budget presented by Pranab Mukherjee attempts to reduce the regulatory tax burden on smaller businesses and easing compliance. The 2009-10 budget was presented in a scenario of decelerating agricultural growth, rising food prices and growing uncertainty due to delayed monsoon. The agricultural growth has dipped to a low of 1.6% during 2008-09 compared to a high of 4.9% during 2007-08. Performance of food grains, oil seeds, sugar and cotton was dismal during 2008-09 compared to 2007-08. This has led to rising wholesale prices of food commodities.

The scenario in ensuing year is not too bright as the delayed and below normal monsoon would adversely affect agricultural production. Such a scenario warranted for more thrust to agriculture sector with respect to budget allocations and new programs. On this count the budget has not included adequate provisions for ensuring a four percent growth in agricultural sector. The focus of this budget is also towards creating relatively more demand in rural area through expanding the existing programs. To accelerate agricultural growth, credit sector received highest priority in the budget. Allocations in social sector will boost demand of goods and services from the bottom of the pyramid. This will help India sail through the period of slowdown.

Presumptive Tax

More than 10 million MSMEs stand to gain from a landmark announcement that enterprises having annual turn over less than Rs. 40 lakh will have an option to declare their income @ 8% and need not maintain any books of accounts. This will rid a very large number of businesses from harassment of Income Tax authorities. The scheme will come into effect from Financial Year 2010-11.

Abolition of FBT

Another simplification booster dose has come from abolition of Fringe Benefit Tax (FBT). A move which will be welcomed by enterprises small or large alike. With announcement of provisioning of funds for Unorganized Workers Social Security the scheme is expected to become operational soon.

Refinancing through SIDBI

The provision of Rs. 4,000 crore to SIDBI for refinancing is also welcome. Though large Indian banks do not have the problem of liquidity, smaller banks and State Financial Corporation can make use of the fund. It may enhance flow of funds towards MSMEs. Some other noteworthy announcements in the Budget to the MSMEs are:

Weighted deduction of 150% on expenditure incurred on in-house R&D to all manufacturing businesses. New Direct Tax code in 45 days GST to be dual Central and State and GST road map to be adhered for 1st April 2010. Linking exemption to investment starting with setting up of cold chains, warehousing etc.

Exports

The Budget has several proposals for the exporters which have been hit by the global slowdown viz.

a. MDA allocation enhanced by 148% to Rs 124 crore.

b. 2% Interest subvention extended up to 31st March 2010 on seven sectors viz. textiles including handlooms, handicr-afts, carpets, leather, gems and jewellery, marine products and small and medium exporters.

c. Exporters spared of first paying and than claiming refunds of Service Tax to transporters and agents. Among the key provisions for sector specific reliefs, are those announced for the Textiles sector.

Textile has been one of the sectors affected adversely during global slowdown. A major reform has been effected by announcing 8% excise duty on man made fiber and yarn on mandatory basis and optional beyond fiber and yarn will help streamline the valued chain. Two more mega handloom clusters for West Bengal and Tamilnadu and two mega cluster schemes for carpets in Srinagar and Mirzapur. Reduction in duty on woolen and cotton waste from 15 to 10% will help the MSMEs manufac-turing blankets and suitings.

Increase in excise duty on cotton goods by 4% will help some mills to recover their accumulated amount without showing any profits in the books, but on the other hand, the increase in excise duty on all synthetic fibres to 8 percent, will increase their burden, and the end-product will become more expensive. Even for export of yarn, all drawback rates will remain the same, which will be a burden on exports, as the raw materials rate for the purpose of draw back will also remain high, due to the increase in excise duty and the extension of 2% subvention will prove to be only partially helpful. Increase in the TUF outlay and a few sops for exporters, was another good initiative.

In sum, abolition of Fringe Benefit Tax and Commodity Transaction Tax, relief for personal taxation exemption limits and refund of Service tax on export trade are a welcome features. Raising of Minimum Alternate Tax (MAT) from 10 per cent to 15 per cent and no relief on corporate income tax and surcharge were disappointments which will nuetralise the benefits that the companies would accrue from abolition of fringe benefit tax. While some of the measures announced in the Budget will bring some relief to MSMEs, longer term structural adjustments that will help MSMEs in the form of cheaper access to credit and assistance in capability building will need to be addressed by the Government outside the framework of the Budget.

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