Finance minister Arun Jaitley on Wednesday reduced tax for smaller businesses that took a big hit following the government’s decision to recall high-value notes.
Presenting the 2017 budget, Jaitley reduced the corporate tax from 30% to 25% for units with an annual turnover of less than Rs 50 crore. These businesses saw a 60% drop in workforce after demonetisation.
“This will make our MSME sector more competitive compared with large companies. The estimated revenue forgo vis-a-vis this measure is expected to be Rs 7,200 crore per annum,” Jaitley said in his speech.
The minister said the reduction in the tax for smaller companies was necessary after demonetisation as they were the major job creators.
“Post-demonetisation, I had a promise to keep to help the micro, small and medium enterprises (MSMEs) sector. MSMEs are the job creators,” he said.
For small and medium-sized enterprises (SMEs) with turnover of up to Rs 2 crore, Jaitley said the presumptive tax would be lowered from 8% to 6%, a move that will lower financial burden and give the much-needed boost to small merchants.
“This 5% tax respite will make a huge difference in the revenue chains of the MSMEs and we will also witness a significant shift from proprietorship registrations to private limited/ LLP registered firms creating a more favourable working environment for MSME players,” said R Narayan, founder and CEO, Power2SME.
Jaitley also said startups could carry forward losses despite change in shareholding. However, there are caveats on promoter shareholding.
For startups, clamouring for tax incentives, the finance minister said they would pay taxes for three out of seven years -- up from five last year -- only if they make profits.
These steps are in addition to what Prime Minister Narendra Modi said on December 31. He announced an increase in the credit guarantees for this sector from Rs 1 crore to Rs 2 crore.
This cash-based informal sector constitutes over 90% of all enterprises and is the largest job provider. Besides, the MSME sector is not yet ready for the goods and services tax and with the new tax regime expected to kick in later this year, it could compound their woes.
“The MAT carry forward for 15 years and the extension to seven years for availing the three-year tax holiday shall leave some much needed cash in their coffers. The 5% tax rebate will also benefit asset management companies,” said Sunil K Goyal, founder and CEO, YourNest India VC Fund. “Predictability shall lead to better inflow of capital in VCF and AIF and will also encourage FDI.”
The 12th five year plan had said Rs 24,000 crore was required to be directed to the sector for healthy growth. Public sector banks that are mandated to lend a certain proportion of their loan kitty to the micro, small and medium enterprises have urged the Reserve Bank of India to relax the credit-rating parameters for these entities.
Credit flow towards the MSME sector has been thinning due to a surge in banks’ non-performing assets.
Most banks have been shying away from financing these businesses due to stringent norms and default rate among the MSMEs has been rising. Commerce and industry minister Nirmala Sitharaman, too, has been drawing attention to the problem.
The budget, however, did not highlight any measures to ease funding. No steps were spelt out for banks worried about loan defaults.