The 2012 Union Budget is widely viewed as a pragmatic one. For the next fiscal, the government is projecting a growth of 7.6 percent, directing its efforts at reducing the deficit while highlighting education and infrastructure as key areas for growth. So far, so good. When it comes to other sectors like IT, Power and MSMEs, the budget, however, doesn’t really deliver in a strong way.
For the most part, small businesses just get a passing mention in this budget, with few incentives and programs geared specifically for them. This has to be disheartening for a sector that is widely credited with fuelling economic growth and job creation. Here’s my take on what’s good and not-so-good for small businesses in this budget:
The Bright Side Skill development
One of the better moves in this budget is the allocation of INR 10 billion towards the National Skill Development Fund. This will be helpful in upgrading skills and addressing the shortage of suitable talent in the Indian workforce.
Revised tax slabs
Raising the limit for compulsory tax audits for SMEs to INR 1 crore from 60 lakhs will also bring relief to many SMEs, especially as we are still in recovery mode.
On the same lines, the income tax of 20 per cent previously limited to those in the 5 to 10 lakh income bracket, has now been extended to cover those making 8 to 10 lakhs. The extension in the tax slab translates into higher disposable incomes for people, which has positive implications for consumption and growth.
Purchase and procurement policy
The policy requiring Ministries and Central Public Sector Enterprises (CPSEs) to make a minimum of 20 per cent of their annual purchases from MSEs has finally been approved. Four per cent of this has been set aside for procurement from MSMEs owned by Scheduled Caste/Tribe entrepreneurs. This is a welcome move in support of MSMEs.
The Flipside Increased indirect taxes
One of the biggest drawbacks of this budget for SMEs, is the increase in indirect taxes. In tackling the fiscal deficit, the Finance Minister appears to have gone the tax increase route, rather than the expenditure management one.
The two per cent increase in service taxes and excise duty can adversely affect numerous players in the SME sector. Most of all, it can curb the very consumption that leads to economic growth.
Not much for IT
The IT industry has been largely side-lined in the 2012 Budget. This may prove detrimental, since many start-ups and existing SMEs operate in the IT sector. The tax holiday for software technology parks and export oriented undertakings expired last year, without any extension. Unfortunately, it was not re-introduced in this year’s budget. This would have greatly helped SMEs in their efforts to set up shop or expand their operations.
Higher indirect taxes will also have an adverse impact on operational costs and prices. Several IT-based SMEs starting up or expanding in Tier I and Tier II cities may have to scale back their plans. This will have a negative impact on overall economic growth.
DTC and GST
Despite talk of revising the Direct Tax Code (DTC) and Goods and Services Tax (GST), the budget doesn’t present a clear plan and time line for implementing these revisions. This is disappointing for SMEs that have waited a long time for these business impacting changes to the tax code. In the final analysis, the 2012 Union Budget forces small businesses in India to look for indirect ways to benefit from the slew of new policies and funds being introduced across sectors.
However, the SME ecosystem in India is strong, and has always pulled through in sun and rain. Surely, the 2012 Union Budget is not enough to dampen Indian SMEs’ spirit. Since it is tax time, I plan to close the year by running the end with a 10 kilometer run on Saturday, the 31st March. So I suggest that you close your books, relax and plan for the next year, just to make it a little less taxing!