Tax sops for Startups, Entrepreneurs and Small and Medium Enterprises (SMEs)
Given the importance of SME sector at the macro-economic level, several incentives have been extended to this sector in form of schemes, grants, concessions, exemptions, etc. These incentives come in form of non-fiscal incentives and the fiscal/ tax incentives.
Some of the non-fiscal incentives are:
● Setting up of Small Industries Development Bank of India (SIDBI);
● Easy and low cost funding schemes;
● Government grants;
● Simplified export procedures;
● Easy regulatory procedures for granting permissions/licenses;
● Establishment of integrated parks with world-class infrastructure facilities
● Reservation of certain products/items for manufacture by SMEs; and
● Recent guidelines for listing SMEs on the SME exchange, etc
From the tax point of view, deductions, holidays, exemptions, etc. are provided in various tax legislation like Income Tax, Service Tax, Excise, VAT and Sales Tax.
Some of the noteworthy tax sops are:
Excise Duty Benefits:
Exemption from excise duty on initial turnover, clearances of Rs 15 million for Small Scale Industries (SSIs) whose turnover does not exceed Rs. 40 million in the previous financial year, subject to satisfaction of certain conditions. Such manufacturers also enjoy the benefit of making quarterly payment of duty and quarterly filing of excise returns instead of monthly payment of taxes/filing of returns for the normal assessees, thereby reducing the compliance costs for such manufacturers. Furthermore, to ease the cash flow position for SMEs, full credit of excise duty paid on capital goods is available in the year of their receipt itself, in single instalment.
Excise Duty Registration Limit for SSI
Manufacturers whose value of clearances in the current financial year does not exceed Rs. 9 million are not required to take registration with the central excise authorities.
Income Tax / Corporate Tax Benefits
Tax deduction under section 80-IB of the Income Tax Act used to be available to SMEs. Deduction under section 80-IC and 80-IE of the Income Tax Act extends to SMEs having specified business undertakings established in certain states. Other tax deductions relate to export related tax incentives, operation in SEZ area, etc. Deduction for employment of new workmen is available under section 80JJAA of the Income Tax Act, 1961 for labour intensive companies. Furthermore, no surcharge on corporate tax applies to small companies having taxable income not more than Rs 10 million, and also a lower surcharge of 5 per cent for total income between Rs 10 million to Rs 100 million as against 10 per cent surcharge for companies with income higher than Rs 100 million. Finally, the turnover limit for tax audit and for the purpose of presumptive taxation of small business entities has been enhanced to Rs. 10 million.
Service Tax Exemptions for small service providers:
No service tax is payable by SMEs whose aggregate value of taxable services provided during the current financial year does not exceed Rs 1 million, provided that the aggregate value of taxable services of such SME does not exceed Rs 1 million in the preceding financial year also.
Service Tax Registration Limit
Exemption for seeking registration under the Service Tax law has been granted to those small service providers whose aggregate value of taxable services does not exceed Rs 0.9 million.
Sales Tax / Value Added Tax Incentives
Most of the states in India have granted the benefit of exemption from seeking registration under the State VAT enactments to SMEs having turnover less than Rs 1 million during the financial year. Moreover, various state governments have enacted a ‘Composition Scheme’ that entitles SMEs to pay tax at a concessional rate (which is lower than the normal VAT rate) on their turnover provided their turnover does not exceed the prescribed limit specified under the respective State VAT enactments. This relieves such entities from time-consuming compliance.
All these fiscal and non-fiscal incentives help SMEs to aim for higher levels of productivity and increase business efficiencies.
Despite initiatives, SMEs grapple with the plethora of challenges, which restricts the growth of this sector and in turn, slows down the country’s economic development. These issues range from capital funding due to lower creditworthiness, lack of cheap, skilled and organised resources like labour and raw material, outdated technology, high real estate costs, managerial incompetency, long drawn processes in approvals/licenses and tough market competition.
From tax point of view, the major issue is the long drawn litigations process, which can take years and years to conclude. Furthermore, many SMEs find conditions for availing certain tax benefits very stringent, impractical and prone to litigation.
One of the key issues faced by SME found place in this year’s Union Budget Speech. The Hon’ble Finance Minister mentioned that SMEs fear losing various benefits if they grow out of the category in which they claimed those benefits. Accordingly, to encourage the SME sector, the finance minister extended certain non-tax benefits to such units for additional three years after they grow beyond the SME category.
What Lies Ahead?
While these steps are welcome, a lot many initiatives are still in the waiting. The survival of this sector is a big challenge today given the bottlenecks, and thus, requires immediate measures to smoothen the functioning of this sector. The most crucial steps would be to address the regulatory hassles and practical difficulties faced by such manufacturers. From a tax perspective, introduction of new tax provisions, which may be similar to section 80-IB, for new SMEs would be a welcome step to boost the budding entrepreneurs. Clarity in laws, quick tax assessments and fast-tracking the litigations are some other factors that would bring efficiency in tax management.