Tax Slab Changes for MSMEs in Budget

Tax Slab Changes for MSMEs in Budget

Look at China – it rules! Why? Flip the Ganesh Idol or Shiva Idol that you use daily for praying. You will most likely see ‘Made in China’ imprinted on it. Flip the phone that you use and you will see ‘Made in China’. Your shoes, your spectacles, your computer, your TV… almost everything that you use on a daily basis – everything is manufactured by China! When an Indian product comes and charges more than the same product manufactured by a Chinese company, we roll up our eyebrows, we widen our eyes and say – it’s too pricey!

Tax Slab Changes for MSMEs in Budget

Did you ever think why Indian products are pricey? Blame the taxation structure that plagued the Indian economy for years. High taxes on MSMEs have always killed the competitive edge that Indian companies could have earned.

What are MSMEs?

MSMEs is the acronym that is used for Micro, Small and Medium Enterprises. Here are some interesting facts about the MSMEs:

  • They contribute 20% of total GDP of India.
  • They contribute 40% of all exports that India do.
  • They employ 80 million people.
  • They mostly work with cash.
  • They often employ unskilled labor force because they cannot afford skilled labor – thanks to high taxes and dampened markets.

Here are some crude numbers from Fiscal Year 2016:

  • There are 2-lakh 85-thousand small companies in India whose profit per year is less than 1 crore.
  • There are 298 large companies in India whose profit per year is more than INR 500 crores!
  • The 2.85 lakh small companies pay tax at the rate of 30.26%.
  • Those 298 large companies pay tax at the rate of 25.90%.

On top of that, these large companies, by virtue of investment commitments, earn subsidies, preferential land allotment, rebates etc. This brings down their effective tax even further down. Contrary to that, the MSMEs don’t get preferential treatment. They don’t get to enjoy subsidies and rebates much because, they cannot promise big investments.

That’s a big anomaly and MSMEs have been victims of favoritism. This is what the government wants to end – to close the anomaly and bring parity in taxation.

Budget 2017 and MSMEs

Before Arun Jaitley tabled the 3rd Union Budget under Modi Government, the Republic of India was hit by a wave of demonetization. High value notes (INR 500 and INR 1000) were killed overnight and surprisingly, they accounted for more than 80% of cash that circulated in economy.

Because of demonetization, the MSMEs or Micro, Small and Medium Enterprises took a massive blow – so much that they talked of layoffs because they could not pay their employees. Why like that? That’s because the MSMEs are heavily cash-intensive. So, demonetization made them vulnerable.

In little under 3 months after demonetization, Union Finance Minister, Mr. Arun Jaitley came up with something good for the MSMEs. The Union Budget came in as a big relief as Jaitley announced changes in tax structure for the MSMEs to bring parity between taxation rates for MSMEs and large corporates.

Jaitley said that for Assessment Year 2015-2016, there were a total of 6.94 lakh companies that filed their taxes. Of these, a whopping 6.67 lakh companies were those that had to pay taxes at the rate of 30.26%. That’s 96% of all companies in India.

To ease the tax anomaly prevalent in India, Jaitley announced:

  • MSMEs with yearly turnover below INR 50 crores will have to pay 5% less taxes than what they usually pay. This means that they will now bay 25% instead of 30%.
  • MSMEs with less than or equal to INR 2 crore of turnover will now be allowed to pay presumptive tax at 6% instead of the previous rate of 8% provided they realize sales proceeds through digital means.

So, as corporate taxes have been reduced by 5% for MSMEs, they can now come at par with large corporates and operate in a more competitive environment. 96% of Indian companies will be directly benefiting from this tax reduction.

Experts think that the MSMEs, because of reduced taxes, can now easily divert funds into R&D and achieve technical competency not just domestically but also on a global scale. They can hire skilled labor, improve production and cut down costs, thereby eliminating stagnation and economic losses over the long run. They will also feel less threatened by Chinese aggression in manufacturing segment.

On the other hand, tax structure has not been changed for large companies or corporates. CII or Confederation of Indian Industries is very disappointed by this move of Union Government but Jaitley seems unaffected by their concerns.

A bit of disappointment for MSMEs

Undeniably, Union Budget 2017 has been designed to be pro-MSME. However, there is one aspect that left the MSMEs a bit disappointed. It is the issue of delayed payments. A study has shown that largest companies in India that depend on the MSMEs for supplies actually owe INR 10,000 crores to the MSMEs. If the payments are made in a timely fashion by these large companies, the MSMEs can proliferate even further. Unfortunately, the Union Budget did not come up with any measure to deal with this problem and hence, the MSMEs will have to keep dealing with this problem.

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