Strong tax focus on Small & Medium Enterprises (SME)
June, 08th 2009
The UPA is back at a time faced with economic slowdown and hence, an immediate agenda of economic revival. The Small & Medium Enterprises (SME) is one of the high growth sector with over 40% contribution to the industrial production. Given the high potential of SMEs to develop entrepreneurial skills, generate employment as well as contribution to the general economic development, some of the key areas for the Government to focus could be as follows:
One of the challenges faced by SMEs is the lack of government focus on reforming tax structure particularly, the indirect taxes with an objective of simplification of tax laws and reducing the burden of tax compliances. This would benefit everyone; however, SMEs would benefit to a greater extent than most as they are less equipped to deal with the intricacy of tax compliance.
While, the Government has endeavored to raise the exemption limits for the Small Scale Industries (SSI) (currently, at Rs. 15 million for Excise and Rs.0.1 million for Service tax), considering that government has more than doubled the investment criteria for SME in recent years, a northward boost to the exemption limit would improve their efficiency. With significant decline in the export revenue of most of the SME dominant sectors such as leather, handicraft, auto ancillary, marine etc, there is an urgent need to introduce specific export promotion schemes for SMEs under the Foreign Trade Policy.
The entry norms prescribing high turnover or investment (such as minimum investment of Rs 10 million for an Export Oriented Unit (EOU) Scheme; Rs 1 million to claim customs duty exemptions on Served From India Scheme) should also be relaxed with a reduction in processing fees for various licenses/ authorization. An initiative towards ab-initio exemption from the payment of service tax on notified services for use in exports could bring down the compliance cost substantially and would also help in the current liquidity crunch. The exporter units may also be allowed to avail the facility of simultaneous refund of CENVAT (Central Value Added Tax) credit along-with rebate of export duties, which would help the exporters accelerate the neutralization of credits and add to cash flow favourably.
Further, in job work situations, the input service tax paid by the principal becomes a cost to them in the absence of any output excise duty/ service tax liabilities, while the job worker is required to pay excise duty on the final selling price of the principal. In such cases, the Government may consider extending the Input Service Distributor concept to include job workers so that the credit of input service tax may be distributed by the Principal to the job worker for effective neutralization.
Largely, the SMEs operate as job workers catering to the needs of Original Equipment Manufacturers (OEMs) and therefore, the current prohibition to claim SSI exemption on production of branded goods may be removed. The job workers also face a challenge in terms of valuation of their goods, since excise duty is currently being levied on the principals' selling price. Besides, extension of excise exemption tothe job workers supplying to SME who in-turn are producing exempted goods may result in cost-competitiveness for the SMEs.