• Budget 2011

Evidence testifies that Small and Medium Enterprises (SME) are significant contributors to the economy of any country. In the Indian context, SMEs are the engine of economic growth contributing to employment generation, effective utilization of resources, foreign exchange reserves etc.  The SME Sector accounts for 40% of the gross industrial value added in India and 47% of the exports of manufactured goods and employ nearly 61 million people.

Realizing the importance of SMEs in economy building, the Government of India (GOI) has in the past undertaken several reforms including provision of grants, fiscal stimulus in form of tax breaks, easy accessibility to funds and tools for attracting capital investments.

Over the years riding on the various reforms and incentives provided by the GOI, the SMEs have outshone other sectors and have contributed handsomely to the Indian economy.  In the Financial Year (FY) 2010-11, the SMEs have contributed 8% to the country’s GDP. During 2010-11, Indian Government had announced slew of measures to counter global recessionary trends including fiscal stimulus measures, refinancing Small Industrial Development Bank of India (SIDBI) for incremental lending, directions to PSUs and Government departments to ensure prompt payment of SME dues and increased credit guarantee cover.

With the sector witnessing a strong recovery the SMEs had eyed on the Union Budget 2011 (‘Budget’) with hopes of further policy initiatives in order to strengthen the growth story. Among others a few initiatives that SMEs anticipated from the Budget were:

* Creation of a Technology Acquisition Fund to enable SMEs to acquire newer/ upgrade  existing technologies in order to compete with imports;

* Facilitate creation of mechanism to effectively link up the SMEs with the technology providers and users of the products;

* Minimize statutory compliance requirements;

* Raise monetary limits provided for auditing and maintenance of accounts under the Income-tax Act, 1961;

* For SMEs engaged in defense sector, setting up of Rs 100 crore technology fund.

The Budget was presented with a fair dose of reforms and steps to curb inflation, check corruption and surge growth. The Indian economy has emerged with remarkable rapidity from the slowdown caused by the global financial crisis from 2007 to 2009. With growth in 2010-11 now estimated at 8.6%, the turnaround has been fast and strong. While some clouds linger, such as continued high inflation and a temporary slowdown in the industrial growth, the dynamism in overall growth is evident. The world economy, led by the buoyant economic activity in the emerging economies, is also gradually recovering from the crisis.

On this economic background, it was the expectation of the industry that there would not be much impact from the taxation perspectives. Also, in view of the proposed DTC, it was widely expected that the Finance Minister would limit his direct tax proposals to initiatives that require immediate attention. Though the Budget showed signs of progressiveness, it did not meet the SMEs expectations which were over shadowed by spotlight on various key sectors like infrastructure development, education and agriculture. The Budget lived the expectations of SME sectors to the extent of continuation of fiscal stimulus measures and availability of credit flows. But still the SME sector needs continued incentives even as it is recovering from the effects of a debilitating global economic crisis that has not spared India.

Introduction of Alternate Minimum Tax (AMT) for Limited Liability Partnerships (LLP) at 18.5% (plus education cess) of the adjusted total income and proposal to withdraw MAT exemption available to SEZ units could be dampener and affect competitiveness of SMEs.

Among the key features of the Budget 2011-12, following initiatives were announced for the SMEs:
* Rs.  5,000 crore to be provided to SIDBI for refinancing incremental lending by banks to these enterprises.

* Support to handloom weaver co-operative societies facing economic stress by providing ` 3,000 crore to National Bank for Agricultural and Rural Development (‘NABARD’); and

* Public sector banks to achieve a target of 15% as outstanding loans to minority communities under priority sector lending at the earliest.

Apart from the specific incentives provided, the Budget in the form of general reforms/incentives would indirectly provide some additional incentives:

* Reduction in the rate of surcharge for domestic companies from 7.5% to 5%.

* Establishment of India Microfinance Equity Fund to protect interests of small borrowers.

* National Manufacturing Policy is proposed to bring down the compliance burden.

* Additional Rs 500 crore proposed to be provided for National Skill Development Fund during the next fiscal.

On the Indirect taxes front, while the SME sector is looking forward to much awaited GST regime, which is expected to be simple and transparent, Budget has proposed to introduce the Constitution Amendment Bill in this Budget Session of Parliament.  This will give a ray of hope for the reduced tax compliance cost and clarity on the tax impact for adopting business decisions.

Amendment to Service Tax Rules regarding timing of tax payment from “receipt of consideration” to “Provision of Service” will have a significant impact on the working capital requirement of the service tax payers. The problem is compounded since Cenvat credit on input services can only be availed after making payment for such service. Therefore the Companies would be required to have additional fund for payment of service tax.

Changes made in the Cenvat Credit Rules as regards the definition of “Inputs” and “Input Services” will give a better clarity (…though not crystal clear) on the Tax compliance and may reduce Tax litigation. However, deletion of the beneficial rule 6(5) from Cenvat Credit Rules will adversely impact the SME sector since the Assessee would be required to prorate common credit to the extent of value of taxable services / goods.

Introduction of self-assessment in Customs and sanction of refunds relating to tax paid on input services used for export of goods will reduce the transaction cost of the SMEs.

Though, there is a thrust on reforms, there seems to be lack of a coherent approach towards a sustained development of the SMEs. All in all, from an SMEs view point, more was expected based on the pivotal role it has played in the economy and it will have to wait for some more time before it get its due share.

The views expressed here are personal.

JAYESH SANGHVI is Tax Partner, Ernst & Young Private Limited.
©Entrepreneur March 2011

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Budget 2011, Ernst & Young, Jayesh Sanghvi, SME