India needs to make life easier for SMEs to ensure economic growth

India’s economic growth is slipping and the rupee has lost much to the dollar over less than a year. The USD was selling for Rs.51.85 on October 7, 2012 less than a year ago and is today hitting new highs against the rupee every day. Every week you read about the government promising ‘reforms’ for business and further liberalization, assuring people that getting foreign direct investment (FDI) in various sectors and even raising the FDI investment percentage in various sectors is very much on their list. For some reason, only big ticket reforms attracting billions of dollars seems important to them. Walmart is being allowed in to sell to the country and build a potential cash cow for them, with an assurance of just $50 million in infrastructure investment (Would that even build a flyover?). How often, do you hear about the government promising anything for the small and medium enterprises (SMEs)?

SMEs employ close to 40% of India’s workforce and contribute 45% to India’s manufacturing output. That’s almost half of the country’s manufacturing output. There are an estimated 48.8 million SMEs in the country and 81.2 million people are employed with them. Close to 95% of these SMEs are micro enterprises. They continue to trudge along without any real support from the government barring lip service and an occasional mention in the budget announced each year. Despite employing 40% of India’s workforce, they only contribute 17% to the Indian GDP. India’s poor infrastructure is a major factor that keeps SMEs inefficient. Let’s look at Mumbai, the commercial capital of India. Consider how many hours people spend stuck in trains and cheap nfl jerseys buses or in cars on the highway? Now multiply the number of hours wasted per person by the workforce in a city and you see the massive inefficiency plaguing the industry.

Red tape is another huge disadvantage to the average Indian entrepreneur. Dealing with the government involves tremendous paperwork whatever you want to get done. From getting a driving license to getting permits for starting a restaurant, everything involves multiple permissions and a mountain of paper builds up over time, even in this ‘post-liberalisation’ era. Think of all the trees that could be saved if the Indian government chose to do away with most of the paper that it generates. These days, opening a bank account for a proprietorship can involve getting a certificate from your chartered accountant (CA)! If you conduct foreign exchange transactions even on a small scale, sending a wire transfer will involve getting Form 15CB from your CA, generating Form 15CA online, filling out a Foreign Exchange Management Act (FEMA) declaration, giving the bank an invoice, a letter and the wire transfer information while at the same time deducting tax at source (TDS), depositing it with the government as also depositing service tax. If you’re wondering about the TDS and service tax, TDS has to be deducted whenever you are making payments to an overseas entity. Service tax is payable ‘by reverse charge’ when you are buying services from abroad. There are various heads for service tax and each head requires separate registration. Service tax, VAT and TDS require filing periodical returns whether you have had reason to deposit any tax or not. This means even ‘Nil returns’ have to be filed.  Tax compliance has been made more and more inconvenient. You are expected to deduct tax when making payments and deposit it with the government every month. Similarly service tax and VAT payments have to be collected and deposited each month. Filing returns for these various taxes have been made more frequent by the government over the years and the compliance burden on the average small business is so high that it is near impossible not to make a few mistakes now and then. Penalties for mistakes in filing taxes have been increased manifold in the last couple of years, in some cases, ten times! Not surprisingly, there are close to 2,00,000 companies that have stopped filing returns altogether. It is reasonable to assume that many companies which do not file balance sheets with the Registrar of Companies (RoC) are unlikely to have met their tax liabilities. Shutting them down is time consuming, expensive and fraught with the same red tape. When they came out with an exit scheme in 2010 for voluntarily shutting down these companies, the government received around 10,000 applications from companies that wanted to shut down. This was described as a ‘good response’ oddly.

Paying taxes just not end at that. A large number of cheap jerseys tax cases end up in court, clogging the system and wasting the time of the average SME entrepreneur. The biggest litigant in Indian courts is the Indian government. Among these cheap jerseys the biggest litigant is the Income Tax department. When the government picks a fight with so many tax payers, they are not only wasting resources of the courts but directly harming the industry by taking away the time that could have been spent managing and scaling up production. The scope of laws in our country is too wide and too much discretion is provided to bureaucrats. This leads to corruption and litigation. I have seen tax guidelines of countries, such as Singapore, which Hungry are actually readable. An average person with some education can read and understand what they are in for. India’s tax laws are cryptic, archaic, verbose and lend themselves to too much discretion. Red tape, corruption and poor infrastructure leads to increased production cost for the SME sector making it impossible for local manufacturers to compete with China even in the local Indian market, let alone the overseas market.

What is needed urgently is a SME policy to overhaul the entire SME sector. Red tape of all sort needs to be kept at a minimum or done away with altogether. There are various inefficiences in the way data is handled likwidacyjn? by government departments. These inefficiences need to be fixed. Reducing the tax compliance burden of SMEs is as important. SMEs should be permitted to file all tax returns annually instead of monthly. The threshold for service tax and VAT is unrealistically low at Rs.8,00,00 (About $13,000) and has been raised over time at a very slow pace. The threshold, ideally, has to be at least twice the present level. Right now companies are expected to get their accounts audited irrespective of their turnover. This practice creates a lot of pressure for new companies Write and seems unnecessary for companies that have yet to report any reasonable turnover when proprietorships reporting millions in turnover continue to be exempt. Penalties for lapses in tax filing, in the interest of creating a fair regime conducive to business, should be restored to the earlier levels. Imposing penalties isn’t working to disuade people as is clear from the hundreds of thousands of companies that have stopped filing balance sheets with the RoC. A simplification of processes will go a long way in encouraging compliance. As regards penalty,the government should consider paying similar penalties itself to the taxpayer in cases of delayed income tax refunds or when the government machinery makes mistakes in processing returns. Government websites have a habit of crashing, are infrequently cheap jerseys updated or have missing information and dead links. This has to be looked at and instead of the permanent focus on widening the tax net, more needs to be done to encourage small businesses and add value.

I wrote last week about the Indian government preventing salaried people from turning entrepreneurs. Such policies and laws come in the way of entrepreneurship. People need to be encouraged to start businesses and not scared away from all forms of entrepreneurship. Everyone who wishes to invest time and money to start an enterprise has to be encouraged. The government should look at launching coworking spaces to make it easier for startups to launch without the pressures of having to lease offices. A broader policy to encourage innovation in businesses, investment in startups and Persons in businesses that are net foreign exchange earners is the need of the hour, much beyond the ‘Served from India’ scheme. Companies can meet their Corporate Social Responsibility obligations by investing in wholesale nba jerseys startups, as per guidelines in the last union budget but a lot more is required. Investment in the SME sector has to be greatly encouraged. The United States had implemented a policy providing for bonus depreciation to companies making investments under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which provided for between 50% and 100% depreciation of all investments made by SMEs. It was for companies investing upto $2 million recognizing that it is the small and medium enterprises that create more employment than the large scale sector, overall. The Indian government, on the other hand, provided for allowance for new, high-value investments of over Rs.100 crores snubbing the SME sector altogether, in their obsession with big ticket investments. What is needed instead is to keep the interests of the SME sector in mind and frame policies that will stimulate investment in the sector, doing away with red tape and making it easier for people to do business. That will create value, pressures add to the economic growth and result in more equitable distribution of wealth.

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