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Urgent need to shape tax policies specific to SMEs

In view of the significant share of SMEs in India’s exports, our Foreign Trade Policy should preferably include SME-specific export promotion schemes.

business Updated: Feb 28, 2008 22:34 IST

Till date, the government’s development strategy for Micro, Small and Medium Enterprises (SMEs) has primarily evolved around Protective Discrimination (industrial reservation), Integration with Large Scale Industries (ancillarisation) and Institutional support. However, to increase cost competitiveness of SMEs in domestic and export markets, there is an urgent need to shape tax policies specific to this sector, especially Indirect taxes. Some issues ailing SMEs are discussed here.

Currently, the turnover limits for exemption from Central Excise duty and Service tax are mere Rs 15 million and Rs 0.8 million respectively. Considering that Government has more than doubled the investment criteria for SMEs in recent years, there is a clear need to accordingly revise the exemption turnover limit upward.

Also, scrapping the cumbersome compliance requirements for exempted units would reduce administrative costs for SMEs and Government alike. The Government should also have a re-look at the rules prohibiting job-workers producing branded goods from claiming the small-scale exemption.

Domestic job workers, many of which are SMEs, have also been adversely affected by introduction of the concept of levy of excise duty on goods manufactured on job work basis, at the principal’s selling price, following which job workers have lost their cost competitiveness to a large extent. Prior to 1 April 2007, excise duty was leviable only on manufacturing price of the job worker, and trading margin of principal was excluded.

In view of the significant share of SMEs in India’s exports, our Foreign Trade Policy should preferably include SME-specific export promotion schemes.

However, in reality, many current benefits for exporters are also out of reach for SMEs; key deterrent being the entry norms that prescribe high turnover or investment criteria (e.g. EOU scheme requires minimum investment of Rs 10 million, served from India scheme requires minimum export revenues of Rs 1 million).

SMEs job-working for foreign manufacturers also face challenges on this front, as current regulations indicate that job workers may be ineligible to claim benefit of the popular Duty Drawback scheme as well as domestic sales entitlements in case of EOU.

With indirect taxes contributing 20-30 per cent of price of goods and services, there is serious need for rationalisation and reforms to ensure that the SME growth story continues.

The authors are senior tax professionals with Ernst & Young