This government has already taken some key steps towards engendering the spirit of entrepreneurship among the Indian population. The steps for incorporating a company, getting approvals, sanctions for land and environmental clearance have all been made substantially easier. The idea is to create an army of small businesses who are job creators in the market rather than job seekers. Budget 2016 has actually taken the logical next step in this direction.
A boost to small and medium businesses…
The MSME sector forms the backbone of the Indian economy in terms of employment generation and contribution to income generation. However, this segment has generally lost out to the larger organized corporate segment due to size and influence. To correct this anomaly, the budget 2016 has put forth a host of ideas to help the small and medium sized businesses. Here are a few of them:
- Under Section 44AD of the Income Tax Act there is a provision of Presumptive Taxation of small units. Currently, this limit has been defined as a turnover of Rs.1 crore per annum. The budget has raised this limit to Rs. 2 crore per annum so that more MSMEs can come under this band and get relief as MSMEs.
- Apart from small and medium industries, the presumptive taxation scheme has also been extended to professionals with an annual billing of up to Rs.50 lakhs per annum. This makes the task of compliance a lot easier.
- The budget 2016 has also tried to benefit the smaller companies by phasing out some of the benefits that larger companies enjoyed. For example, accelerated depreciation will be restricted to only 40% from April 2017. The benefits of deduction for R&D will be phased down to 150% from April 2017 and 100% from April 2020.
- In addition the benefits of Section 10AA available to new SEZ units will be only available to units that are set up before April 2020.
- There is an additional benefit for smaller and new businesses that are set up after March 01, 2016. Such companies will have the option to directly pay corporate tax at the rate of just 25% of pre-tax profits. This will mean that such companies will not be able to avail of exemptions under profit-linked and investment-linked deductions. This is a great boon for smaller companies who do not have the need for such incentives and will directly benefit with a lower tax rate.
- Small and medium sized businesses will also have the benefit of lower tax. The government has chosen to avoid a blanket reduction in corporate tax rates. But it has made an exception for companies with an annual turnover of less than Rs.5 crore per annum. They will start paying a lower corporate tax rate of 29% from the next financial year.
- The budget 2016 has also promised 100% deduction in profits for the first 3 out of 5 years for start-up enterprises set up between April 2016 and April 2019. Of course, such companies will have to continue to pay the MAT at the extant rates.
- Last, but not the least, the government has also reduced the excise and customs structure in such a way that small and mid-sized companies in sectors like IT, hardware, textiles, chemicals, paper etc can get the benefit of lower input costs through a more friendly excise and customs duty structure.
The focus of this budget has been to focus on 3 basic issues as far as small and medium sized companies are concerned. Firstly, the attempt has been to create a healthy ecosystem for such companies to combine entrepreneurship with profitability. Secondly, the focus has been on giving the small and medium companies a level playing field vis-a-vis the larger companies. The third effort has been to tweak the duty structure in such a way that the small and medium companies in critical industries can get the benefit of lower costs.
The message of the Union Budget 2016 seems to be quite clear. The government is willing to support small and medium sized business. This enables these companies to focus on growth without worrying about their teething problems in the early years. When one combines the above advantages with proper new business mentoring system as well as easy availability of finance, the perfect ecosystem for SMEs gets created. The budget has surely taken the first critical step in that direction.
Read more about Union Budget 2016 highlights at Religare Online.