Sunday, March 4, 2012

Budget Expectations of SMEs

Budget Expectations of SMEs

This is that time of the year when every interest group articulates their wish list and expectations from the upcoming budget. Here is one such wish list on behalf of the Small and Medium Enterprises (SME) segment, which acts as the bulwark of the economy, contributing almost half of India’s industrial output and employs over 25 million people, the largest sector after agriculture.  A boost to this sector would go a long way in reviving the sagging economic growth rates and have a much wider impact on large section of the population.

Progressive Tax Rates for SMEs

A Progressive Tax regime for Corporate Tax i.e. higher marginal tax rates for higher levels of income akin to personal income tax rates, can benefit SMEs to a great extent.  The marginal utility of the tax saved by SMEs are far greater than that for large corporates, and the cash preserved can increase higher levels of re-investment in business and aid the growth of SMEs. United Kingdom has a progressive tax slab for corporates, while Canada and Russia have special (lower) tax slabs for SMEs. While the current fiscal condition in India may not warrant any major reduction in marginal tax rates, a progressive tax regime can meet the fiscal objective while benefiting several small enterprises.

Encourage Capital Expenditure by SMEs

A fiscal incentive that encourages locally sourced capital expenditure can initiate a virtuous cycle of growth in demand for capital goods which in turn spurs demand for components, basic commodities, logistics and related services.  Allowance of higher depreciation benefits for capital expenditure for  a limited period can kickstart demand cycle without seriously denting the Government’s fiscal situation as shortfall in corporate taxation will be more than offset by indirect tax growth on capital goods and intermediate products.

Early implementation of GST

The current service tax / VAT regime in India, that varies from State to State is very complex, seriously affecting the climate for entrepreneurship.  A transparent and stable Goods and Service Tax (GST) regime is a crying need of the hour, and the Budget should aim at implementing this progressive tax regime immediately across the country. The flaws in implementation in the current regime such as in Service Tax which is liable for payment immediately upon raising invoice irrespective of credit period and collection should be addressed in GST implementation as this has serious implications on the already precarious working capital position of most SMEs.

Large corporates not only have stronger voice in opinion making, but also have quick feet; they can channelize their investments to the lowest cost country anytime as is being witnessed now in India where outbound investments are growing rapidly. On the other hand, SMEs continue to remain where they are, making local investments and providing local employment.  The Budget presents an opportunity to take targeted policy initiatives outlined above to help SMEs grow.

N. Muthuraman is ex-Director Ratings, CRISIL and Co-founder of RiverBridge Investment Advisors Pvt. Ltd., a boutique financial advisory firm.

This is the blog of the Print Version published in Business Line dated 5th March 2012

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