A good and balanced Budget 2017 is critical to spur the Indian economy’s growth which has suffered hiccups, one of the reasons being the recent demonetisation. The Small and Medium- sized Enterprise (SME) sector, which is construed as one of major contributor to India’s economy is effected the most due to demonetisation.
So, it becomes the need of an hour to provide policy support to the SME sector which employs a big percentage of India’s workers and chips in substantial amounts to its Gross Domestic Product (GDP). The Budget 2017 should bring a cohesive and structured approach to boost the development of SMEs. The foundation has been laid earlier by Hon’ble Finance Minister during his Budget speech of 2015 wherein he has clearly spelled out its objective of turning the SME into an economic force. The strategy was proposed to cover all stages of business development to achieve this goal namely: financing, choice of production methods and technology, and marketing.
This year’s Budget is expected to take forward the agenda on “Make in India” and provide incremental benefits to the manufacturing sector in India. The SMEs are an integral part of the manufacturing ecosystem and we believe that any announcements in this connection relating to a reduction in the corporate tax rate, increased depreciation, weighted deduction on employments generations, etc. can impact SMEs positively.
Recently, the government has announced an extension of the credit guarantee limits of SME loans to Rs 2 crores and has extended the same to loans disbursed by Non-Banking Financial Companies (NBFCs). It is a great step considering a lot of new-age alternate SME lenders will also get covered under this scheme.
The following are some key expectations to boost SMEs ahead of Budget 2017:
1) Tax holidays for new SMEs – In order to boost the new SME and to keep an alignment with the tax incentives available for start-ups, a tax holiday of five years can be given to new SMEs which will be starting their businesses on or after 01 April 2017. A new and meaningful definition can be created for SMEs to ensure this benefit is availed of by bonafide SMEs.
2) Investment allowance under section 32AC of the Income Tax Act, 1961 (the Act) – Currently, a deduction under section 32AC of the Act is granted in case an assessee invests an amount exceeding INR 100 crores in new plants and machinery (after 31 March 2013) and such plants and machinery have been installed by the assesse within a block of three years. In this regard, it is recommended that the threshold for investment in new plants and machinery should be reduced for SMEs to enable them to take the benefit under section 32AC of the Act or a specific provision be introduced in the Act for extending the benefit of investment allowance to SMEs.
3) Concessional tax rates for SMEs – While there has been a reduction in the tax rate for smaller assessees in the last budget, we believe that there is a case for substantial reduction in tax rates (corporate tax, MAT, etc) again for SMEs in Budget 2017. The reduction in the tax rates can encourage such entities to invest more in growth and expansion.
4) Need for a relaxation in Non-Performing Assets (NPA) norms for SMEs – Amidst the volatility in the global economy and the Indian economy, the sectors like real estate, textiles, steel, power, etc. are majorly wedged. This has resulted in delays in liquidating the funds as many of the suppliers to these are SMEs which are not getting payments on time. As a result, SMEs are facing survival challenges; hence, the units are turning sick/non-operational. Therefore, there is need to reconsider the existing classification norms for SMEs of 90 Days and to increase the same to 180 days from Financial Year 2017-18 onwards in order to revive the SMEs.
5) Incentivising the usage of digital payments to SMEs – The government has recently amended section 44AD of the Act to incentivize small traders/businesses to proactively accept payments by digital means, and reduced the existing rate of deemed profit of 8 per cent to 6 per cent in respect of the amount of total turnover or gross receipts received through banking channel/digital means for the financial year 2016-17. This beneficial provision may be extended beyond financial year 2016-17.
6) Tax benefits for start-ups – The government may consider announcing a string of initiatives to support start-ups, including increasing the duration of the tax free regime from three years to five years, faster procedural clearances, exceptions to be carved out for start-ups under section 79 of the Act on the carry forward of losses pursuant to multiple rounds of funding, long-term capital gains tax regime should be made more liberal for start-ups by reduction in holding period to 12 months from the current limit of 24 months, etc.
Further, in Budget 2016, Section 54GB of the Act was introduced to incentivise investments in start-ups in the manufacturing sector. This beneficial long term capital gain tax exemption should not be restricted to the sale of residential houses and plots of land, but could be extended to capital gains from ‘other’ assets as well.
(The writer is Partner, Tax, KPMG in India)
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Updated Date: Jan 27, 2017 10:36 AM