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Wishlist for small and medium enterprises

business Updated: Feb 28, 2008 22:30 IST

Dollar depreciation, high crude oil prices, high borrowing costs and a poor infrastructure system has brought the SME sector under a great deal of pressure. The SMEs are hoping some respite on the fiscal side in the current Budget 2008 to balance these factors through a series of rationalisation measures.

The sunset clause to the income-tax holiday available for the units set up under the STP and EOU scheme post March 2009 is likely to add significant cost pressure to the domestic players in the globally competitive export market. The SEZ sops are not enticing for the SME sector due to limited SEZ space, location issues, and high property rentals. Banking on the support from the Commerce Ministry and the Communication and Information Technology Ministry, exporters are expecting an extension of tax holiday to provide a level playing field for SMEs. A tax holiday to trade exporters would also assist canalising the exports from SME in an efficient manner.

FBT is a hard hitting tax and estimates suggest that the tax is no longer “fringe” and comprises around 5% of the PBT for SMEs. FBT provisions should be rationalized to exclude genuine business expenses (business promotion, traveling, etc) from the ambit of FBT. FBT should be allowed as a deductible expense in computing the income of the employer on the same lines of other levies. Considering the rapid technological changes, rates of tax depreciation on plant & machineries should be enhanced to 25% from present rate of 15%. Benefit of additional depreciation on plant & machinery in the initial year should be extended to service entities also.

While corporatisation of SMEs is being encouraged, Minimum Alternate Tax (MAT) and Dividend distribution tax (DDT) are adding additional layers of tax. A reduced MAT and DDT for SMEs based on income slabs would help in reducing the tax pinch.

On the compliance side, considering the current business environment and inflation levels, the threshold limit for compulsory tax audit should be enhanced to Rs 10 million from the present level of Rs 4 million which was introduced in 1984.

High tax collections in 2007-2008 are expected to give the government sufficient room for tax rationalization to promote growth in the economy – hope Mr Chindambaram does the balancing act to add fuel to the growth engines of the Indian economy.

The authors are senior tax professionals with Ernst & Young