Union Budget 2019: These tax reforms could help Indian MSMEs go global

With just a day to go for the Union Budget 2019, there is considerable debate on the key areas that it would focus.  The prime minister in his first speech in the Parliament after his re-election has mentioned that agriculture, manufacturing and exports deserve attention. MSMEs have collectively been the key contributor to the growth of the manufacturing sector and exports in India. Now that the sector has just recovered from the clutches of demonetisation and GST, it is time that adequate tax reforms are introduced to give a fillip to the sector and meet the objectives of the new government.

Some of the key expectations of the MSME sector have been listed below:

MSMEs are often impacted by the clutches of the Minimum Alternate Tax (MAT) regime given the complex computation mechanism and unintended tax consequences in certain scenarios. The government should consider abolition of the MAT regime for MSMEs with a specific turnover criteria.  This will provide clarity on the tax regime.

Modify provisions for carry forward of losses on mergers: Revival of loss making MSMEs needs to be a key focus of the government. Integration of the business of such MSMEs with other profitable ventures will ensure effective utilisation of business resources. While provisions for the same exist in section 72A of the Income tax Act, 1961, only specific sector are entitled for the benefit. The government should consider extending the benefit to service sectors and also relax the conditions mentioned in the section for carry forward of the loss benefits.

Extend the 25 percent tax rates to partnership firms / LLPs: The lower tax rate of 25 percent is currently applicable only for companies. A significant number of MSMEs are currently organised as partnership firms/LLPs given the stringent compliance requirements in a corporate structure. Hence, the 25 percent tax rate should be extended to partnership firms/LLPs.

Preferential tax rate for exports/entities listed on SME exchanges: MSMEs contribute to 95 percent of the enterprises in the country with 40 percent of the total international exports. In order to encourage exports, the government can look at providing a lower tax rate for export income similar to the models adopted by other countries.  Also, the role of MSMEs have been recognised by the economies across the globe leading to setting up of SME exchanges in various developed and developing economies. Listing on SME exchanges have various advantages viz. access to capital, liquidity and good governance. To encourage listing on the SME exchanges, the government can consider providing a preferential tax rate for entities listed in the SME exchange.

Extend upfront deduction on capital investment for all sectors: Currently, the government has provided for deduction in respect of specified capital expenditure by entities in certain sectors under section 35AD.  This deduction has encouraged fresh investments in those sectors.  In order to push for growth in the MSME space, the government can extend this deduction to all MSMEs irrespective of the sector.  A turnover threshold can be provided to identify the MSMEs eligible for the deduction.

Higher depreciation rates for plant and machinery: Given the continual change in technology and the need to replace machinery at regular intervals, a higher depreciation rate of 50 percent will need to be considered for plant and machinery.

Quicker processing of refunds: Processing of tax refunds have been a constant worry for MSMEs as the working capital gets locked up. While there are provisions in the law towards this end, the refunds are seldom issued immediately. Quicker processing of refunds will need to be ensured to bring in transparency in payment of advance taxes and effective working capital management for the MSME sector.

Incentivise research: Research and development would be the key to see exponential growth in the MSME sector and accomplish the objectives of Make in India.  With the government’s thrust competing in the global landscape, innovation will be the one factor that MSMEs will need to focus on. To incentivise this, the government should consider restoring the 200 percent weighted deduction on R&D expenditure. The conditions for claim of this weighted deduction would need to be eased out as MSMEs may not have the resources to comply with the stringent requirements of the DSIR. The deduction can be granted based on self-certification up to a certain limit (say Rs 10 crore).

Energy efficiency tax deduction: India has become a key member in addressing the issues of climate change through effective and feasible interventions. Energy efficiency cannot be addressed unless change is brought at the level of MSMEs. The government can consider providing tax credits/weighted deduction for investment in energy efficiency property i.e. for solar or wind equipment.

It is the ideas that course the shape of history.  The government will now have to come up with new ideas/reforms to revitalise the MSME sector and pave the way for taking our MSMEs global.