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Last Updated : Feb 23, 2016 06:54 PM IST | Source:

Budget 2016: Government should consider tax rebates to encourage SME

We can adopt the simplified tax and administrative processes available in other countries.

Sanjay Aggarwal

According to the MSME Annual Report 2014-15 released by the Ministry of MSME, the contribution of MSME sector to the Indian GDP currently stands at 38 per cent. The sector currently contributes to 45 per cent of industrial output and employs more than 100 million. This clearly indicates that the SME sector is the backbone of the Indian economy and there is a need to address the concerns of this sector.

The sector currently faces a number of challenges such as constraints on working capital, high interest costs, difficulties in raising funds and are generally impacted by delayed payments from their customers; thereby creating significant cash flow burden on the day to day business. Further, multi fold regulations create tremendous pressure of compliance and administrative work.

Protecting cash flows, focusing time and energy on business development, ability to invest in technology, people, markets, etc. are some areas that can help the sector develop competitive edge in the domestic as well as global markets.

Here are key expectations from Budget 2016 that can help the sector work on their priorities:

Protect cash flow:

Tax reforms can create 10 per cent or additional working capital for SMEs. Some reforms:

  • A differential tax structure with lower tax base of 10 per cent to 15 per cent.

  • An exemption for payment of advance taxes and flexibility to pay taxes once a year during tax return.

  • Faster completion of summary tax assessments and refunds.

These reforms that can ease cash flow and help reduce burden of interest costs on SMEs, currently incurred on borrowing funds to discharge their tax liabilities. These will be crucial tax reforms for SMEs.

Provide tax incentives

The government should consider tax rebates to encourage SMEs to adopt latest technology, build an efficient IT infrastructure. It is important that SMEs develop global competitiveness. It should also work on strengthening investments in new markets, technologies, research and development, creating employment opportunities, training for skill development, etc.

The sector is also highly impacted by foreign currency. SMEs are also negatively impacted by growing hedging costs. Tax reforms to encourage hedging and insurance shall enable SMEs to not take undue exposures and mitigate their business risks.

We should acknowledge that the needs of the SME sector are different from MNCs and hence we should have separate schemes for the sector similar to countries like Canada, France, Sweden, U.K., U.S. and Japan. These countries also have special tax incentives (on earnings or expenditure), subsidies for SMEs and start-ups.

Simplify regulatory burden

The government should work on simplifying regulatory compliances relating to various filings such as service tax returns, TDS returns, MCA filings, various state specific compliances which are currently required at different timelines i.e. monthly, quarterly, half yearly, annually, etc. Currently, the exit procedure or closure of business is complex, and compliance to all these norms requires a lot of time and efforts. Simplification of the same shall help increase contribution to business growth and eventually contribute to the country’s GDP and enable higher tax collection.

As per the MSME Annual Report 2015, released by the MSME Ministry, there are around 4.48 million MSMEs in India. Every 100 hours of compliance burden saved by each SME can release many billion man hours for the nation.

We can adopt the simplified tax and administrative processes available in various countries including Brazil, Italy, Canada, etc.

The government should widen the definition of angel investors to cover an individual investor as well as angel investment group. Also, the investments by angel investors should not be subject to tax. This shall encourage capital flows towards SME.

The sector is positive towards the ensuing Union Budget which will be unveiled on 29 February 2016 and it is expects it to introduce changes in the tax policy that can help create a conducive growth environment for SMEs.

Author is Partner and Head, KPMG Enterprise
The views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG India.

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First Published on Feb 23, 2016 05:56 pm
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