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Budget wishlist: Fiscal stimulus should continue
February, 17th 2010

According to the report of the Task Force on Micro, small & medium enterprise (MSME) the  sector with a contribution of 8% of Indias GDP, 45 percent of manufactured output and 40% of Indias exports, is employing around 6 crore people and is a major participant in Indias economic progress. 

With more than 90% of MSME units being in the unorganised sector, the growth and development of the MSME sector is of paramount importance for overall development of the Indian economy, especially to counter the stiff competition from our neighbouring country i.e. China.

Towards this end and to counter global recessionary trends, the Government had announced various fiscal stimulus measures for MSMEs in the first quarter of the calendar year 2009 including excise duty cuts, larger credit flows, directions to PSUs and Government departments to ensure prompt payment of MSME dues and increased credit guarantee cover.

To further boost the sector, a Task Force on MSMEs was constituted in August 2009, which in its January 2010 report has recommended a continuation of the 2009 stimulus package and additional public spending on setting up of rehabilitation fund as well as promoting establishment of business incubators, creation of separate funds by commercial banks with SIDBI towards MSE credit targets, establishment of a SME exchange as well as a creation of a independent national level body for the promotion and development of the sector.

Clearly, the MSME sector needs continued incentives even as it is recovering from the effects of a debilitating global economic crisis that has not spared India.  And the question is what more can the Finance Minister offer in the forthcoming budget?

On the finance side, the MSME sector needs continued financial support in order to increase credit off-take and further facilitate the day-to-day operations, which could be achieved through establishment of specialised MSME banks and encouragement through provision of fiscal incentives to the existing Non Banking Financing Companies (NBFCs) to lend to the MSME sector. 

Risk capital is crucial for further development of the MSME sector. Regulatory and taxation relaxations could be provided to venture capital funds/companies to encourage them to finance start-up MSME units.

Direct tax policy can be used as a catalyst for growth and development in the MSME sector through provision of tax breaks and incentives. Here, the Government could consider providing additional tax incentives for R&D activities carried out by MSME units to promote technological upgradation of the units resulting into cost effective quality output.  Tax depreciation rates could be enhanced and also, the existing accelerated depreciation for new plant and machinery could be extended to all other assets. 

Further, given the comparatively small investment in capital assets in the MSME sector, employment generation based deductions available under section 80JJAA of the Income-tax Act, 1961, currently available to companies only, could also be made available to other business enterprises in the MSME sector.  Further, existing tax holidays should be continued for MSME units and not withdrawn as proposed in Direct Tax Code regime.

On the Indirect taxes front, while the MSME sector is keenly looking forward to the proposed GST regime, which is expected to be simple and transparent for MSME units, till GST introduction, to enable MSME units to withstand the competition and promote their equitable development, the current location based indirect tax benefits should be made available to MSME units independent of their location. 

In view of rising inflation in the economy, the Government could consider enhancing the exemption limit for excise and service tax for MSME units.  Procedure for refund of excise and customs duty could be made speedier and simpler.  The MSME units could be exempted/ made liable at concessional rate of service tax in respect of certain key services for the MSME sector such as electricity, rent and so on.

Given the scarcity of means and resources, MSME units are unable to cope up with protracted litigation with tax and regulatory authorities. Thus, a single appellate forum for all types of tax and regulatory matters specific to MSME units such as income-tax, indirect taxes, labour laws etc, could be set up for speedy and cost effective resolution of disputes.

The time has come for the Finance Minster to bite the bullet and to aggressively promote the development of the MSME sector and its entrepreneurial spirit through various fiscal as well as operational measures to enable MSME units to support Indias economic growth.

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