Why is India’s tax administration not in sync with MSMEs and exporters?

June 10, 2020 5:09 AM

As a comparison, one should bear in mind that 12 million entities are GST-paying businesses, of which not more than 500,000 are registered companies.

India tax administration, MSMEs, exporters, GST revenue, direct taxes, Credit availability, CAIT, DGFTAs per official estimates, there are 63.05 million micro industries, 0.33 million small, and 5,000 medium enterprises in the country.

By Ajay Agnihotri

The Report of the Working Group on Micro, Small and Medium Enterprises (MSMEs) Growth for the 12th Five Year Plan (2012-17) estimated the sector accounts for 45% of the manufacturing output and 40% of total exports of India. As per official estimates, there are 63.05 million micro industries, 0.33 million small, and 5,000 medium enterprises in the country. As a comparison, one should bear in mind that 12 million entities are GST-paying businesses, of which not more than 500,000 are registered companies. The remaining 95% are small businesses, but who also pay almost 30% of India’s GST revenue and an equivalent in direct taxes.

The enlightened bureaucracy may be laughed off as an oxymoron and their alignment with the macroeconomic policy can only be wished. This is even more so when it comes to India’s taxmen. When the finance minister announced direct tax concessions for ‘companies’ in 2019 Budget, one wondered about the policy briefing. Why should a government, regarded as MSME and trader friendly, disfranchise 95% of the population (proprietorships and partnerships) and choose to benefit only the corporates? It certainly does not answer to a populist move. Neither does it answer to an economic move of improving liquidity in the hands of small businesses. Nor does it answer to the adage of improving compliance through a tax-less and collect-more philosophy. India’s informal sector is big and the number of MSMEs is very large. Credit availability is a challenge for them in general, working capital availability particularly so, even in the best of times, and especially now in the wake of banks having cut back on lending. Yet the government chose that they pay taxes at higher rates!

Let’s move on to exports. The world recognises that e-commerce is the bandwagon that can enable our small businesses to become international brands and reach the more remunerative markets of the world. Appallingly, Indian Customs took seven long years to provision the automated express courier terminals. And having started them, howsoever belatedly, one would think of a rapid proliferation to all cities branded as centres of ‘export excellence’. But no, what started as a pilot continues through three years till date from the airports of Delhi, Mumbai and Bengaluru. That’s a wasted decade.

Even more disappointingly, the pilot served the interests of MNC e-commerce companies, the likes of China’s Club Factory, the ‘Gift’ mafia operating out of the Middle East, but not our MSME exporters. It finally took the Confederation of All India Traders (CAIT) to raise a storm against ‘gifts’, forcing the Directorate General of Foreign Trade (DGFT) to prohibit them and the racket to stop. Even today, an Indian MSME cannot export through the automated express courier terminals, adversely affecting their competitiveness and timeliness, so critical to winning the e-commerce race.

The DGFT is no better. Responding to a call to encourage e-commerce exports, it notified books, handicrafts, bespoke tailored garments, footwear and toys under the Merchandise Exports from India Scheme. And what do Indian MSMEs export through e-commerce—pharmaceuticals, cosmetics, artificial jewellery, leather handbags and high street fashion garments. One wonders who prepared the policy brief!

Export-related subsidies are crucial to the micro, small and medium-sized exporters, as tough competition in terms of price from East Asian countries is their biggest challenge. The competitors enjoy higher subsidy packages from their respective governments as compared to Indian MSMEs. Infrastructure-related problems like setting up factories, capacity, remoteness to airports, accessibility to export destinations, lack of warehouses in foreign markets, etc, pose serious challenge to the Indian small and medium-sized exporters as compared to their East Asian counterparts.

Small businesses of India hope that the new secretary of MSMEs, with all the experience in the PMO, will bring tailwinds for them and a broad-based economic revival of India.

The author, a former IRS, is an advocate

 

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