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, employing more than
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 a large section of the population.
PROGRESSIVE TAX RATES
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 is far greater
than that for large corporates, and the cash preserved can increase levels of
re-investment in business and aid the growth of SMEs. United Kingdom has a
progressive tax category for corporates, while Canada and Russia have special
(lower) tax categories 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 goal while benefiting several small enterprises.
ENCOURAGE CAPITAL EXPENDITURE
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 kick-start the 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 GST IMPLEMENTATION
The current service tax / VAT regime in India, which 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 the need of the
hour, and the Budget should aim at implementing this progressive tax regime
immediately across the country. The faults 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 channelise
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 as listed, to help SMEs grow.
