This is that time of the year when every interest group articulates their wish list and expectations from the upcoming budget. Here is one such wish list on behalf of the Small and Medium Enterprises (SME) segment, which acts as the bulwark of the economy, contributing almost half of India's industrial output, employing more than 25 million people, the largest sector after agriculture. A boost to this sector would go a long way in reviving the sagging economic growth rates, and have a much wider impact on a large section of the population, according to The Hindu Business Line.
A Progressive Tax regime for Corporate Tax i.e. higher marginal tax rates for higher levels of income, akin to personal income tax rates, can benefit SMEs to a great extent. The marginal utility of the tax saved by SMEs is far greater than that for large corporates, and the cash preserved can increase levels of re-investment in business and aid the growth of SMEs. United Kingdom has a progressive tax category for corporates, while Canada and Russia have special (lower) tax categories for SMEs. While the current fiscal condition in India may not warrant any major reduction in marginal tax rates, a progressive tax regime can meet the fiscal goal while benefiting several small enterprises.
A fiscal incentive that encourages locally-sourced capital expenditure can initiate a virtuous cycle of growth in demand for capital goods, which in turn spurs demand for components, basic commodities, logistics and related services. Allowance of higher depreciation benefits for capital expenditure for a limited period can kick-start the demand cycle without seriously denting the Government's fiscal situation, as shortfall in corporate taxation will be more than offset by indirect tax growth on capital goods and intermediate products.
The current service tax / VAT regime in India, which varies from state to state, is very complex, seriously affecting the climate for entrepreneurship. A transparent and stable Goods and Service Tax (GST) regime is the need of the hour, and the Budget should aim at implementing this progressive tax regime immediately across the country. The faults in implementation in the current regime, such as in Service Tax, which is liable for payment immediately upon raising invoice irrespective of credit period and collection, should be addressed in GST implementation, as this has serious implications on the already precarious working capital position of most SMEs. Large corporates not only have stronger voice in opinion making, but also have quick feet; they can channelise their investments to the lowest cost country anytime, as is being witnessed now in India, where outbound investments are growing rapidly. On the other hand, SMEs continue to remain where they are, making local investments and providing local employment. The Budget presents an opportunity to take targeted policy initiatives as listed, to help SMEs grow.