With 28 million units employing over 60 million people, the micro, small & medium enterprise (MSME) sector is very large, highly heterogeneous and complex. The size of units varies from units with just one self-employed person to those employing a couple of thousands ? from a humble tailoring shop to an automated food processing plant or a high precision component manufacturing unit supplying to India?s space mission or nuclear reactors. The range is mind-boggling. Obviously, so are their needs.
An analysis of the memoranda of MSME associations presented to the finance minister for consideration while drawing up the Union Budget 2010-11 highlights their wish-list regarding not only direct and indirect taxes, but also about issues related to access to finance.
MSME associations are increasingly wary of the Reserve Bank of India. They are in agreement with several former RBI governors who have raised the demand for a separate regulator for banks to encourage customer orientation among them. It is being felt that the central bank is too occupied with macro management of the economy. It is said that the decision-making process of banks continues to be non-transparent, discretionary and the grievance redressal mechanism largely defunct.
To augment credit flow to the sector, it is suggested that first, a few large SME-dedicated banks?Indian or foreign?should be allowed to be established to facilitate greater competition in the MSME space. Second, greater focus is required on NBFCs to ensure competitively priced credit lines to them. Third, specific steps are required to enhance access to risk capital through angel/venture capital and private equity funds. In this regard, SME exchanges/ platforms that were recently allowed by Sebi can play a crucial role if some fiscal incentives could be provided to mutual funds/FIs to invest a small percentage of their portfolio in MSME exchanges. Fourth, ?subordinate debts? of various types that require only the residual charge on assets should be treated as promoter?s capital so that they could be used to leverage secured debts.
Representations to the finance minister state that direct taxes have to be leveraged to attain socio-economic goals and key national priorities to create a level-playing field. Indirect taxes should be totally transparent and non-discretionary so that there are no distortions felt in the economy.
Attributing the decline in a number of small manufacturing units to the prevailing unattractive risk-reward ratio, FISME (and other associations) have suggested a slew of measures to reverse the trend.
First, tax breaks may be given based on the high ratio of employment generation than on the capital invested. (This will help MSMEs in capital formation in some measure as they are unable to claim depreciation benefits due to a lack of large investments in capital assets).
Second, 100% depreciation on the purchase of production machines and R&D equipment must be allowed to MSMEs to give a fillip to scaling up and technological upgradation.
Third, profits ploughed back by MSMEs into business may be exempted from income tax. Fourth, graded taxation for companies and limited liability companies may be introduced on the basis of income slabs.
Further suggestions include TDS/certificates/tax credits allowed to be carried forward from year to year for MSMEs; a provision for submitting annual returns in lieu of monthly returns; and several new amendments for further strengthening the provisions against delayed payments under the MSMED Act.
An affirmative action suggested is worth noting: ?Purchases from MSMEs may be incentivised if weighted deductions are allowed to large enterprises and encouraging them to make purchases voluntarily from MSMEs and thus serve the policy of the government as enunciated under the MSMED Act?.
Regarding indirect taxes, the first and foremost demand of MSME associations is about enhancing the threshold exemption for excise duty. It is stated that the excise duty exemption co ntinues to be relevant for many products. Given their small size and informal nature, such enterprises find it too difficult to comply, but are ready to bear the cost burden by not availing set-offs. In view of the rising raw material costs in the last three years, the government may take a sympathetic view on enhancing the exemption limit for excise and service tax.
Those MSMEs that have opted to be covered under Cenvat complain about two frequent problems: delay in refund of excess duty paid and the current provision of charging interest on excise duty on supplementary invoices.
There is unanimity on the need to implement a unified goods & services tax (GST) as early as possible. It is suggested that GST may be levied on electricity to complete the value chain.
MSMEs have highlighted the problems they face regarding the collection of central sales tax forms from buyers. Often the buying dealer does not bother to furnish the C-form to the seller. It has been suggested that responsibility for not issuing the C-form be held on buyer by amending the Act with retrospective effect.
The demand for the introduction of advance ruling provision in excise and income tax has been reiterated by many.
Finally, one predominant issue that MSMEs have raised is about the abuse of ?safeguard? and ?anti-dumping? provisions by large monopoly domestic producers of raw materials, particularly in sectors such as steel, copper, aluminum and plastic raw material/ polymers.
They have demanded strengthening of the institutional mechanism to ensure prior consultation with affected MSMEs. They have advocated mandatory inclusion of the MSME ministry in such consultations.
?The writer is secretary general, FISME
