No case for withdrawal of export incentives to SMEs

Updated: Jan 6 2006, 05:30am hrs
RAM Prasad was shocked to receive a demand notice from the Income Tax Department for payment of Rs 13.5 lakh pertaining to a previous year, despite having paid full Income Tax as per law. The department had disallowed deduction under section 80 HHC for the duty drawback benefit received by his company. A show cause notice was also sent for short payment of Income Tax. Mr Prasad has been struggling to cope with the increase in prices of non-ferrous raw material, crucial for his production unit. This price has shot up by over 90% in the last two years. But his overseas buyers dont want to pay higher prices; theres stiff global competition. He built his 100% export company with entrepreneurial spirit and earned a recognised export house status. On pursuing the issue with FIEO, he found many such cases of bureaucratic misinterpretation of the law.

The small business sector contributes about 30% to our manufactured products exports. About 10-12% of indirect exports from the manufacturing sector originate from small enterprisescomponents and intermediate inputs.

From a share in world trade at just about 0.7%, government aims to improve it to 1.5%. But the WTO regime implications pose a threat to the SME export effort; increasing competition and withdrawal or reduction of incentives. We have hardly any incentives left. Indian companies find it more lucrative to sell in the domestic market, given the surge in buying capacities.

The first shock came when the cash incentives (CCS) was withdrawn in July 1991. This was followed by withdrawal of Income Tax benefits under section 80 HHC of the IT Act over a periodfrom 1999 to 2004. The axe has now fallen on the duty drawback and the DEPB schemes. Exporters are now considering a shift of their manufacturing base to other countriesdue to the lack of an attractive tax structure, inadequate infrastructure, ambiguities in taxation, and harassment of SMEs by reopening of past cases under the Income Tax Act.

For Indias trade, competitive cost advantages come from the availability of local raw materials and skills, and low wage rates and production costs. But India agreed to WTO obligations that fail to meet the exigencies SMEs face, due to stringent provisions under the Trips agreement and provisions on bio-diversity and traditional knowledge. The issue is not whether present exports sops are WTO compatible. The point is, there is no case for withdrawing the existing support systems for promoting exports of SMEs products from India in view of the considerations set out above.

On the contrary, there is need to work out a comprehensive export strategy with built-in provisions for incentives. We need to resist global pressure for at least another decade to enable Indian SMEs transform with better technologies and management systems, concessional finance, technological support and adequate marketing assistance. Government must address these issues, with convergence in the inter-ministerial approach.

The Government may also keep in view the high transaction cost in India. In fact, I suggest the incentives and other benefits available to the enterprises in the Special Economic Zones (SEZs), particularly under section 80 HHC of Income Tax Act, should be applicable to the exporting units. Similarly, Export Oriented Units (EOUs) should be allowed a tax holiday at least till 2010 as recommended by FIEO.

The government should engage directly with the SME exporting community, and harness their energy by unleashing the entrepreneurial spirit of Indian businessmen.

The author is chairman, SME Committee, All India Management Association & former chairman NSIC