Budget 2020: Govt must offer T20 pace of tax reforms for SMEs to chase $5-trillion target in time

Financial Express |
Suraj Malik , Partner
Transaction Tax
Tax and Regulatory Services
|

01 February 2020

Union Budget 2020 India: Budget 2020 should remove this dichotomy and encourage CSR expenditure by allowing it as a tax-deductible expense. The proposal on Social Stock Exchange announced in the last budget should get implemented with clear tax policy granting tax exemption to investors.

GST and Taxation for MSMEs: The year 2020 marks the beginning of a new decade. Most organizations, administrations and establishments had in the earlier decades set defined goals and visions for 2020. As an anecdote, Vision 2020 is also the name of a WHO-launched global initiative that aimed to eliminate avoidable blindness by the year 2020. Indian economy is at this cusp of an important and significant transition in this decade, led by several initiatives since the NDA government came into power in 2014. It is a paradox that currently some of those initiatives itself are helplessly blamed as avoidable blindness by the policymakers to have resulted in lowering the rate of growth.

Still an Illusion

This has brutally impacted our SMEs- which constitute the backbone of our economy and thus causing it to crouch. Statistically, SMEs contribute about 30 per cent to the Indian GDP and provide employment of over 110 million. Thus, the vision of a $5 trillion economy would merely be an illusion unless SMEs are rejuvenated to drive growth.

Several initiatives like Make in India, Credit Guarantee Scheme, MSME Procurement Policies are all a big shout by the government that set the play in motion; yet a larger number of SMEs are standstill at stumps perplexed by the economic situation and policy uncertainty.

Stakeholders of this economic match now feel that the budget 2020 will be the outcome of the strategic timeout between the Finance Minister with her team of secretaries along with the chief economic advisors. We have witnessed outcomes of such periodic timeouts with a series of measures and sector-specific initiatives announced as part of multiple press conferences. As a result, it is widely expected that budget 2020 would give the Finance Minister a full-scale opportunity to hit the pitch harder and accelerate the growth by ushering tax reforms. It is commonly accepted that there will be a greater focus on the SME sector and some of the tax measures that can boost SMEs and consequently the economy at large are encapsulated in this article.

Level Playing Field

SMEs are usually organized as non-corporate structures such as proprietorship or partnerships, given the relative simplicity in set-up and administration vis-à-vis corporate setup. While the Finance Minister brought cheers to Indian corporates by slashing the tax rates, these non-corporate entities continued to be taxed at a higher rate. Budget 2020 should bring in parity for SME entrepreneurs and a level playing field, by further lowering the tax rates for all entities operating in SME sector irrespective of their legal form. It is also important to allow tax-neutral reorganizations into different entity forms without any restrictive conditions linked to turnover or assets, which is vital for the succession of SME businesses through family generations.

Tax compliance for SMEs is a major concern and so is the administrative cost for the tax office. Presumptive income tax is a simplified tax regime and greatly reduces the cost of both compliance and tax administration. This turnover threshold to qualify for this regime should be increased to Rs 5 crores and the benefit should be extended to all legal entity formats, including LLPs. This will also improve our ease of doing business ranking.

Expenditure incurred to meet mandatory Corporate Social Responsibility (CSR) is not permitted to be claimed as a tax-deductible expense. This disincentivizes and brings a lack of transparency in CSR plans. Budget 2020 should remove this dichotomy and encourage CSR expenditure by allowing it as a tax-deductible expense. The proposal on Social Stock Exchange announced in the last budget should get implemented with clear tax policy granting tax exemption to investors.

Transparency and Impact

On a similar footing, innovation and research are key for sustainability and growth. Small businesses are already shy of investing in research and development (R&D), given limited resources. Budget 2020 should reintroduce a weighted tax deduction towards R&D expenditure for encouraging investments in R&D. Working capital issues impacting growth at SMEs are partially due to unavoidable delays in the processing of tax refunds and other government payments. The budget proposal must include a scheme which ensures a timebound and a transparent processing of payments and refunds due from Govt and further strengthen MSME Samadhaan and bringing a new Payments Act.

SMEs are predominantly family-owned and managed and are unable to compete with larger players to attract a skilled workforce. Budget 2020 can address this by introducing provisions that allow a tax neutral vesting of shares to SME employees that bring in desired skills and knowledge.

To conclude, the Indian economy at $5 trillion can only be achieved by vision acuity which is also popularly referred to as 20/20. The expectation from budget 2020 is an unblemished and vibrant vision 6 by 6 on every count that would bring along a powerplay revival and revitalization of SMEs and foster growth in the entire economy.