The MSME sector contributes nearly 8 percent to the country’s GDP, 45
percent of the manufacturing output and 40 percent of the exports. However, statistical
data of the past few years indicates that the share of MSMEs in GDP,
manufacturing output and exports has been slowly declining. This is primarily
because of shrinking demand both externally and internally for MSME products.
The revitalisation of the MSME sector would require that the government
incentivises manufacturing in this sector through a slew of measures. Addressing
the anomaly in the levels of excise and customs duty on MSME products would go
a long way in refurbishing a declining growth in the MSME sector.One of the key
steps to incentivise production in the MSME sector would be to bring the excise
duty on MSME products and customs duty for foreign cheap products which have
edged out MSME products in market on equitable terms.
The sector faces
immense competition from cheap imports, especially from China. Consequently,
there is a need to offset the challenges faced by the MSME sector by reinvigorating
and reviving shrinking demand and fighting competition.
In 2013, the Inter-Ministerial Committee for Accelerating Manufacturing
in Micro, Small & Medium Enterprises Sector submitted a set of
recommendations in which it listed 'Incentivising through Taxation' as a policy
option for the government.The Inter-Ministerial Committee suggested a
‘deferment scheme’, whereby it suggested that the Ministry of Finance may
consider allowing a rapidly growing unit to retain a portion of tax payable
such as excise, income tax, etc. for 3 to 5 years, if the unit is growing year
on year above national average. Allowing MSME firms to pay less in excise or
income tax would incentivise the next cycle of investments to be made by these
firms.
Excise exemption is another area that can be explored to exhort
entrepreneurs in the MSME sector to embrace technology and innovation as a
result of increased savings. At present excise exemption is withdrawn when the
annual turnover exceeds Rs.1.15 crore and a Chartered Accountant is required to be engaged when the annual
turnover exceeds Rs.1 crore. This is too narrow a financial leeway. Raising the
excise exemption bar, would incentivise both savings among entrepreneurs and
hence production. If manufacturing in the MSME sector has to be accelerated,
vulnerable sub-sectors like the handicrafts sector should either enjoy
exemption of excise duty or face only nominal taxation. Lastly, a balanced
growth of the MSME sector is necessary for an even growth in rural employment.
This would in turn require geographically-specific targeting of areas with
cluster development. Areas that are not well connected to the rest of the
country and areas lagging behind in industrialization should be targeted as
potential areas to be benefited out of excise duty and other tax exemptions.
The other option, raising of customs duty for goods that are imported at
cheap price, needs to be exercised with immediacy. The custom duty on prices
from China looses relevance when the concept of imput cost is not very
transparent in that country. Many rightly suggest that
cheap Chinese goods have made deep inroads in the Indian markets and are edging
out the relevance of MSME products. One of the major issues to be considered
for the review is to counter the imports of electronic system and design
management sector. To this effect, the
Ministry has urged Department of Electronics and Information technology
to take measures for blocking the entry of technically inferior products into
the country. Before India becomes China’s backyard for dumping its cheap
products and more importantly, before MSMEs in India decline further, customs
duty on cheaply imported goods should be reviewed. The criticism of this step
would be that India would be promotingprotectionism. As much as that criticism
might be valid, protecting jobs at home and more importantly protecting the
cultural ethos though MSME promotion should be a national interest priority.
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