India needs tax reforms to boost small firms, says NITI Aayog member Arvind Virmani

NITI Aayog member Arvind Virmani (Image source: https://www.niti.gov.in/)

India needs to simplify its tax regime to ease the compliance burden on small and medium businesses, a member of the government's top policy think tank said Thursday, as smaller firms may not have fully benefited from recent reforms.

Small and medium businesses, which account for nearly a quarter of India's economy, were hit the hardest by pandemic-induced disruptions even as New Delhi extended cheap loans.

Simplifying tax rates would add to the efficiency of micro, small and medium enterprises (MSMEs), make imports competitive and improve export prospects, NITI Aayog member Arvind Virmani told Reuters in an interview.

"Tax reform is still needed for the smaller companies. Tax reform is still important and that includes income tax, GST (goods and services tax), customs, everything," Virmani said.

Small and medium businesses account for over a third of local manufacturing and more than 40% of India's exports, according to government estimates, giving them a significant role in generating jobs.

The reforms will help MSMEs "participate fully in this boom, which I am convinced, I am sure will happen in the next three-to-five years," Virmani added.

India, the world's fifth largest economy, is also one of the fastest growing major economies globally, and aims to boost its manufacturing capabilities and increase its presence in global supply chains.

To that end, a production-linked incentive (PLI) scheme introduced in 2020 is Prime Minister Narendra Modi's main industrial policy to boost manufacturing.

Virmani said India's manufacturing growth was "somewhat slower" because the real effective exchange rate had appreciated and impacted India's exports and import competitiveness.

"So, the latest data shows that some of that appreciation which happened in that period of slow growth, is being reversed," Virmani added.

The Indian government is also reviewing the PLI scheme to improve its implementation, Virmani said.

As part of that review, the Indian government met large global firms such as Foxconn, Samsung Electronics and Reliance Industries last month.