Are small businesses benefitting from tax incentives

Deepa Krishnan

Small businesses and start-ups are the backbone of any developing economy as their energy, vision and innovation create jobs in the market. The Budget has bought a smile on the faces of these dynamic entrepreneurs as most industry experts concur that Finance Minister P. Chidambaram has given the sector a much-needed push.

Extension of non-tax benefits for MSMEs

In his Budget speech, FM P. Chidambaram said, “Micro, small and medium enterprises (MSME) have a large share of jobs, production and exports. Too many of them do not grow because of the fear of losing the benefits associated with staying small or medium."

In order to encourage their growth, the FM proposed that the benefits or preferences enjoyed by MSMEs will continue for up to three years after they have grown out of the category in which they originally obtained the benefit. FM said, “I propose that the non-tax benefits may be made available to a MSME unit for three years after it graduates to a higher category."

Scope for MSMEs to take on big players

The proposal will benefit small companies that find growth daunting because of the sudden costs they may incur.  Chartered Accountant Bhargava Vaidya, BN Vaidya & Associates says, “This will enable consolidation of any business. They often prefer not to scale up, as they do not want to lose out on tax benefits." Moreover it will encourage small businesses to take on businesses from the larger players. Sanjay Kothari, Convenor of promotion, marketing and business development at Gem & Jewellery Export Promotion Council said, "So far there has been a clear divide. Now, small businesses will become more competitive and competent. Large companies can outsource some of their work to them which in turn will help them increase revenue.”

Expectations shortchanged

The government has however, not addressed one of the significant demands of the sector which was to increase the limit on excise duty (production of up to Rs 1.5 crore) and service tax (production of up to Rs 10 lakh). Raising these crucial limits would have allowed the MSMEs to address the hike in raw material prices, fuel cost and inflation that have dented their profit. 
India has many thriving small and medium sized businesses in the private sector which do not depend much on the state as in economies like China’s. With their innovativeness and scope of swift expansion, small businesses have traditionally been the drivers of the Indian market. The recognition that these businesses can now row the economy to safe shores is seen as a welcome move.

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