Current Income Tax Convergence at SMEs in India

Sarika .R. Lohana ·

Abstract:

Small and Medium Enterprises (SMEs) according to their growth

Keywords –

·
Academic Associate, Matoshri Pratishthan Group of Institutions, Nanded, Saru.patil@gmail.com
Introduction:

Several tax reforms being executed by the Indian government will bring benefits to SMEs,
though they may impact the compliance processes and require SMEs to gear up for the
impending changes. The Ministry of Finance, Government of India has launched a massive
initiative towards tax reforms in India. The reforms aim to strengthen the process of opening out
the Indian economy from a taxation perspective. The changes are much awaited in the
international community that trades with India as well as foreign investors with interests in
Indian businesses.

The SME sector, though not at the eye of the storm, will stand to benefit from these changes in
the long term. A new Direct Tax Code (DTC), the draft version of it was brought out in 2009 and
circulated widely for comments, introduces major reforms for corporate and personal taxation in
the country with the broad objective of lowering tax rates while bringing a larger number of
taxpayers into the tax net. The DTC will drastically change the taxation structure in the country,
lower corporate and individual tax rates and introduce general and special anti avoidance
measures, advance pricing arrangements (APA) relating to transfer pricing and tax treaty law
applicability.

Goods and service tax another major initiative is the goods and service tax (GST), which have a
dramatic impact once it succeeds in creating a common market across India, which is Asia's third
largest economy. GST will eliminate tax variations between states and therefore smoothen out
bottlenecks for movement of goods. Estimates say that improved tax collection would help trim
the fiscal deficit to 4.1 percent of GDP by 2012/13 from 5.5 percent projected this year.
Businesses and investors are hopeful that the GST will bring down the tax burden by eliminating
multiple taxes and reducing corruption and red tape.

These changes will have a significant impact on how SMEs function. The primary benefits are
obvious-lower tax rates, easier processes, transparency, speed of filing, etc. Business benefits
from GST are obvious as well for SMEs that manufacture goods and supply them to destinations
across India.
Both the GST and the STPI are delayed as of now, with the government making required
amendments before they are tabled in Parliament. STPI and SEZ schemes Export-oriented SMEs
also stand to benefit as the government is considering laws that offer tax benefits to Indian small
and medium exporters under the Special Economic Zone (SEZ) and Software Technology Parks
of India (STPI). Tax benefits under the STPI scheme are available only till March 31, 2011 and
while large IT companies, for instance, will be able to mitigate tax pressures arising from the
expiry of tax holiday by moving into SEZs, SMEs will not be able to do so as they do not
possess the size, scale and financial wherewithal to avail the benefits of SEZ. SMEs form the
bulk of companies registered under the STPI scheme. The industry bodies and the government
are therefore looking a solution tailor made for SMEs. It remains to be seen what this would be
and how it would benefit SMEs.

IFRS convergence
A related reform has been the conversion of reporting standards from Indian GAAP to
International Financial Reporting Standards (IFRS), a significant move that will allow Indian
companies to list easily on exchanges overseas as well as facilitate the investment of foreign
corporate into India.

Transition to IFRS is an ongoing process in India and though International Accounting Standards
Board (IASB) have issued a simplified version of the International Financial Reporting Standard
(IFRS) for SMEs in 2009, in India the official agencies are yet to arrive at a financial definition
for SMEs. The IFRS compliance is still a while away and since SMEs are usually not listed, not
a priority for the Indian financial sector right now. However, it's a milestone to look forward
since it will bring in the much required structure and organization into the SME sector.
Significantly, adoption of IFRS is expected to cut compliance costs for SMEs in the long term as
the processes are simplified and modified to suit SMEs.

Stress on incentivizing SMEs to go in for corporatization, facilitating skill development,

promoting dedicated venture capital funds for SMEs to facilitate innovation, and creating
conducive policy environment for SMEs operating in STPI (Software Technology Parks of
India).
Similarly, it added, SMEs employing apprentices for imparting skills should be given incentives
by allowing them to deduct double the apprenticeship cost from their accounts for income tax
purpose subject to the condition that such apprentices do not exceed 20 percent of the workforce
of the unit.

According to the industry body, venture capital funds are generally reluctant to invest between
Rs. 2 crore to Rs. 50 crore in SMEs to facilitate innovation in this sector, and therefore
deductions by way of dividend or long term capital gains should be made available under Section
10 of the Income tax Act for a dedicated SME venture capital Undertaking and to investors
investing in venture capital funds.
The Union Budget 2011-12 for India's SMEs'
Much was expected by small and medium enterprises (SMEs) from this year from the Union
Budget 2011-12, but it was a letdown, to say the least. Except for a couple of proposals, the
Budget by and large didn't mention anything substantial for the sector. And despite the fact that
the Finance minister Pranab Mukherjee allocated Rs 5,000 cr to Small Industries Development
Bank of India (SIDBI), it was received with little cheer from the sector. When we look at this
budget for SMEs, one scary fact is the moving of the service tax from cash to accrual basis. Now
what will happen is that liquidity will become an issue. SMEs have to pay service tax for the
money that hasn't come to them. And then the second issue that will come up is that of bad debts;
there can be bad debts in any business. How will SMEs take care of that? So this change of
system which the FM is planning will be detrimental for SMEs.

Another thing which SMEs were expecting from this budget was interest rates on loans. The FM
did look at the farming sector where he proposes loans for farmers at a cheaper rate. While the
SME sector is the foremost employment-generating sector and helping in the growth of
economy, the Finance Minister had nothing to offer to it in regard to availability of cheaper
loans. We are all aware that SMEs are not getting funds and even when they are getting them,
they are available at an interest rate of 16 percent or even higher. Meanwhile, on the positive
side, the Finance Minister has announced incentives for micro, small and medium enterprises
(MSMEs) as an allotment to SIDBI for refinancing incremental lending by banks to these
enterprises has been raised from Rs. 4000 crore to Rs. 5000 crore. It has also been proposed to
provide Rs. 3000 crores to NABARD, which will benefit about 3 lakh handloom weavers.

While on the issue of rising input cost, the Finance Minster did touch upon the issue by trying to
control inflation, but that was not going to happen immediately. With prices of every raw
material and labor cost going up with inflation, the SMEs will not be able to pass on this extra
cost to the customer. And with customers not ready to pay more, the SMEs will have to bear this
cost.

Besides SMEs, if we look at export-import, there are few things which have been done, like,
reducing some duties, which are probably going to help exporters. Another aspect which I found
good for exports was getting refunds for service tax. It has been a big hassle for exporters,
especially for the smaller ones and planning to simplify the process will be a big advantage for
them. The FM has proposed to ease the process of refund of accumulated credit to exporters of
services by making necessary changes in the definition of export of services and procedures,
which is also a good move.

Having said that, I was hoping that the Finance Ministry would grant interest subvention for the
exports sector, particularly for the SME sector as the cost of credit has already gone up
substantially with the adoption of base rate and interest rates are further looking northward.

Conclusoion :