Small & medium enterprises are an important and integral part of our economy. Besides encouraging entrepreneurial talent, they provide direct and indirect employment to a large number of people. Global economic meltdown has not only affected large companies, but has also adversely affected SMEs, due to contraction in demand both globally and in the domestic market. To support SMEs, the government has proposed various initiatives in the current year?s Budget, which inter alia include the following:

Most of the businesses have faced huge liquidity crisis in the last few months. SMEs have particularly been impacted and are still facing credit crunch. In order to facilitate flow of credit at reasonable rates, government has proposed to allocate Rs 4,000 crore as a special fund out of the Rural Infrastructure Development Fund (RIDF) to the Small Industries Development Bank of India (Sidbi). The objective is to incentivise banks and state corporations to lend to micro & small enterprises by refinancing 50% of incremental lending to such enterprises during the current financial year.

Even though India boasts a robust and well-founded banking system, still many parts of the country do not have banks in their vicinity. The government has proposed to set up a sub-

committee of state-level bankers committee to identify areas that remain under-banked or unbanked; and provide banking facilities to all these areas in the next three years. A sum of Rs 100 crore has been set aside for this purpose to provide at least one centre/point of sale for banking services in each of the unbanked blocks in the country. This initiative will help small enterprises in the rural and semi-urban areas to avail of banking loan and credit facilities.

To support the ailing handloom sector, the government has proposed to set up one handloom mega-cluster each in West Bengal and Tamil Nadu and also to set up one powerloom mega-cluster in Rajasthan. Further, a mega-cluster for carpets has been proposed in Srinagar (J&K) and Mirzapur (UP). This will help the handloom sector, which is undergoing deep crises and also generate new job opportunities in these regions.

Another good proposal is in respect of employment exchanges in the public-private partnership with the aim to bridge the gap between job seekers and job providers. Under this initiative, a job seeker would be able to register online on the national Web portal, which will contain data regarding availability of skills, personnel and job openings.

From the direct tax prospective, there is a significant proposal in the current year?s budget. It is proposed that the scope of presumptive taxation should be extended to all small businesses, except a few having a turnover up to Rs 40 lakh. All such tax payers will have an option to declare their income from business at the rate of 8% of the gross turnover/gross receipts and simultaneously enjoy exemption from the compliance burden of maintaining books of accounts.

Further, as a procedural simplification, these enterprises would also be exempt from the advance tax payments and can pay their entire tax liability at the time of filing their return. This new scheme is to come into effect from the financial year 2010-11. Of course, it could be debated whether the small businesses actually earn income at the rate of 8% of their turnover or lower, especially in the current economic slowdown. Still, this is a move in the right direction with twin objectives. First, this would encourage compliance at the ground level, and help small businesses reduce their compliance costs. Second, this would help these enterprises avoid unnecessary exposure/litigation with the tax authorities at the ground level.

Tax deduction for contributions made under the new pension scheme (NPS) has now been extended to self-employed persons as well. Therefore, sole proprietors can now contribute to NPS, build up their retirement fund and also claim tax benefit. The government intends to incentivise businesses by providing investment-linked exemptions rather than profit-linked exemptions. This year it is proposed to provide tax incentives to businesses for setting up and operating cold chain facilities for specified products; and for warehousing facilities for storage of agricultural produce. These are again good opportunities to explore either individually or in consortiums.

Also rationalisation and simplification of tax deducted at source (TDS) provisions and removal of surcharge and cess on the TDS on non-salary payments made to residents would help businesses, including SMEs in terms of their compliance requirements and also, hopefully, reduce litigation. It is indeed encouraging that in spite of fiscal pressures the government has attempted to provide relief to the SMEs both from macro-economic as well as from tax perspective. All these are welcome initiatives and should help the SMEs in carrying out their business and meet the challenges of the growing economy.

The writer is executive director, KPMG