Background

1. Access to institutional finance (absence of which stifles growth and scaling up)
2. An enabling regime of direct and indirect taxes ( heavy cost of which induces informality and encourages horizontal expansion)   

Keeping in view that manufacturing-unlike most of the services, are subject to global competition and have to survive competitive pressures of imports, attaining economy of scale is critical for MSMEs. Paying adequate attention to these two sets of issues is imperative for survival and growth of manufacturing in MSME.  
FISME’s memorandum for the Union Budget (2012-13) focuses, therefore only on  these two aspects of policy. 

A.        Access to finance

1. NBFCs can be vital intermediary financial institutions for micro and small enterprises. These need to be actively promoted through supportive policies.
2. Venture Capital and Private Equity Funds are badly needed by the small and medium sector to start new ventures and scale up existing ones. This segment needs to be expanded fast not only for innovative and high tech start ups but also for conventional industries.
3. Large SME dedicated banks may be encouraged to be set up by domestic/foreign players with deep pockets and experience in hand holding MSME borrowers. This step will create much needed competition and nudge the existing bankers to also aggressively lend to MSMEs.
4. Securitization of trade receivables may be introduced to allow bond market to develop, attract funds in large volumes and at concessional rates all in the interest of MSMEs.
5. SME exchanges/ platforms need liquidity to stay afloat. Some fiscal incentives could be extended to Mutual Funds/ FIs investing in these exchanges.

B. Direct and Indirect Taxes:

1. Suggestions for Direct Taxes

Tax Breaks may also be allowed on employment generation in addition to capital outlay
It is the MSME sector that is creating all the new jobs in industry and that too at a fraction of the investment made by corporate. As tax breaks at the moment are linked exclusively to capital outlays- benefitting the big projects only- capital formation also takes place in big companies only. 
For capital formation in MSMEs, tax breaks may be given, based on the ration between employment to capital invested.

1. Accelerated depreciation be allowed to MSMEs on the purchase of production machines and R&D equipment to give fillip to technological up-gradation and scaling up and adopting green processes.
2. Profit ploughed by the Small Scale and Micro Industries into business could also be exempted from levy of Income Tax.
3. Graded Taxation for companies and LLPs:

To encourage SMEs to move to Co. format, slab wise taxes in line with individuals and proprietorship firms will help.

1. TDS: TDS may be allowed to be carried forward from year to year.
2. Interest on late payment to MSMEs due under MSMED Act, may be mandatorily disclosed in tax audit report and the amount disallowed as expenses.
3. Weighted deductions/Tax concession may be allowed to large enterprises on purchases from MSMEs.
4.       Specific changes sought in Income Tax Act 1961

Section 2(15) of the Income-tax Act, 1961 to specifically include the activities of business chambers/ associations devoted exclusively to micro, small and medium enterprises in the definition of ‘charitable purpose’. Micro, small and medium enterprises need a ‘platform’ to highlight their problems and hardships. This is possible only through associations or chambers exclusively catering to their needs.

1. Section 194A, 194C, 194H, 194-I and 194-J occurring in Chapter XVII of the Income-tax Act, 1961 not to apply to any person defined in Section 2(31) of the Act, who are covered under the MSMED Act, 2006 and whose total sales, gross receipts or turnover from the business or profession carried on by him, does not exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum, as enumerated in sections 194A, 194C, 194H, 194-I and 194-J, is credited or paid.
2. The provisions for interest on payment of advance tax needs to be amended. It is increasingly getting difficult to estimate the income in advance. If one under-estimates income, one is required to pay interest on the corresponding amount which cannot be treated as expense.  It is proposed that advance tax for the quarter (other than that ending on 31st March) be paid 15 days after the quarter. This will help in making a correct estimate of the tax payable and will also obviate the necessity to pay refunds, thus reducing administrative work. Installments for Fringe Benefit Tax (FBT) initially followed this system.    
3. Suggestions for Indirect Taxes

1. Central Excise:

1. Refund of Central Excise Duty: 

Rules for refund of excise duty need to be simplified. There are occasions when higher price may have been charged or sales bill deducted by buyer for any reason and lower CED amount paid on the reduced value of goods. In such cases the Assessee should get back the refund expeditiously. At present the concerned Central Excise Officers are totally reluctant to process any request for refund of excess duty. The matter should be carefully looked into – to be fair to the duty payer. 

1. Interest on Central Excise Duty (CED) on supplementary Invoices: 

In sales made under contracts, often there are provisions for price variation based on increase/ decrease in prices of inputs. The present practice is that once additional price payable on account of PV clause is approved by the buyer, the seller issues CENVAT Invoice to claim this additional amount from the buyer and charges CED thereon. Interest has been demanded on CED on this additional amount on the ground that this portion of CED has been paid late with reference to clearance of goods. Until the additional amount is approved by the buyer, there is no way that the seller can claim the additional sales value. Accordingly interest can be charged only if he delays depositing CED, beyond the date of CENVAT Invoice for the additional amount. From the view point of equity and fair play, interest should not be levied in such cases

2. Service Tax:

Electricity is an important input for all industries but for some sectors it is the single biggest raw material. Therefore, Service Tax may be levied on electricity to complete the value chain.  It would also help bring down cost of electricity.
GST is one reform for introduction of which MSME sector in particular is waiting             anxiously. The belief is that as a result a common market will come into being, distortions due to tax concessions including location based will be eliminated and tax regime will get simplified and rationalised.

3. Central Sales Tax Until GST is introduced following amendments may be considered in CST

At present there is nothing in the CST Act Rules that can help the selling dealer to make the buying dealer issue the required form. As principally the burden of tax is of the buying dealer, in case form ‘C’ is not issued he should be made liable to pay /reimburse the selling dealer, the difference in tax along with interest and penalty. The Act / rules need to be amended in this respect so that the life of the selling dealer does not become miserable for somebody else’s   omission.
The amendment requested above should be with retrospective effect.

1. Period of Submission of ‘C’  Forms:

For the reasons stated above, the new stipulation that form-C should be deposited with the Account Officer within 6 months of transaction, needs to be withdrawn and deposit of Forms allowed until assessment / Appeal as it is not feasible to comply with the existing rules

4. Customs Duty

Unfortunately much of the Safeguard and Anti-dumping duties are levied to protect large monopoly domestic producers with scant regard to the interests of MSME industrial consumers whose competitiveness is adversely affected by such moves. These cases are particularly predominant in four sectors: Iron and Steel, Copper, Aluminum and plastic raw material/ polymers.
All the current ongoing safeguard and anti-dumping duties need to be reviewed.
3.         Suggestion for enhancing revenue and improving tax compliance

1. Nothing could be more detrimental to the image of the tax regime than harassment of a genuine assessee. Theft needs to be differentiated from technical / genuine mistakes –and should be liberally given benefit of doubt.  The widely prevalent practice among Assessing Officers is to levy duties/ taxes with the sole intention of protecting themselves. The practice needs to be discouraged. Approach of the department and its Accounts Officer should undergo a paradigm shift and become advisory/friendly so that entrepreneurs do not evade the tax net for fear of these dept.  Without making conscious efforts in this direction, expanding tax base would be very difficult.
2. Provision of advance ruling may be introduced in Excise & IT:

MSMEs being perpetually short on capabilities and capacities do not have resources to fight out cases and appeals at different levels. Many times the maze of assessments and appeals can result in a MSME getting bogged down in litigation. It will be a great relief particularly to the MSME, that want to comply with laws / regulations, if they can know in advance the impact of any section of the Act or of rules on a particular piece of his activity /proposed step in business.