Union Budget 2001-02 (28/02/2002)

FISME memorandum at Finance Minister's Pre-Budget meet. (08/01/2002)

VAT without abolishing CST is dangerous for SMEs. (09/08/2001)

FISME welcomes steps towards VAT (09/07/2001)

EXIM policy announcements

                                 FISME welcomes steps towards VAT

"The decision to implement State Value Added Tax by April 2002, taken during the Conference of the Chief Ministers of the States recently, is a defining moment for India. This is a step which is crucial in integrating the markets within India to pave way for seamless flow of goods within the country. It will also help reduce the transaction costs. The Finance Minister and the Chief Ministers need to be complimented for the statesmanship shown by them by taking this step."

"The multiplicity of Sales Tax coupled with central sales tax has been a major impediment in the growth of Small and Medium Enterprises (SMEs) also. It is to be remembered that CST does not affect the large enterprises much as they could establish branch offices and transfer the stocks. It hurts the SMEs and the small traders the most."

Mr. Dinesh Singhal, President, FISME has said that as the amendment bill for replacing the CST and Indian Stamps Act is already in the Parliament, FISME is hopeful that the bills will be passed within the monsoon session. This will give 2-3 months preparation time to the companies to go for full VAT for 2002.

FISME hoped that the states would take the necessary steps with urgency.
Mr. Singhal also welcomed the agreement on with-holding funds to the defaulting states that do not implement the VAT system.

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                  FISME memorandum at Finance Minister's Pre-Budget meet

During the pre-budget meet held on 7th Jan 2002 under the chairmanship of Finance Minister, FISME has emphasized that in view of globalization the Government needed to encourage the programmes and policies that instilled competition and competitiveness to ensure industrial growth and needed to abandon the policies that inhibit it.

Highlighting several cases of reverse tariff escalation, Shri V.K. Agarwal, Sr. Vice President of FISME questioned the Finance Minister on rationale of keeping artificially high tariff for Iron and Steel, Copper, Aluminium and Plastic raw material when global capacities had been created in the country in these sectors and half of their produce were already being exported profitably. Most of the intermediate and finished goods manufactured by small sector using them as raw materials, attract lower duties and therefore have become uncompetitive. FISME demanded drastic reduction in the customs duty on these sectors.

While the initiatives on VAT were greatly welcomed by FISME, the memorandum warned that if CST was not made zero or made vattable, VAT would prove disastrous for industries in general and SMEs in particular.

Reacting on the support agenda of the Government for small sector and its failure to make any dent at the ground, FISME suggested that the government should use self-help-groups and associations in the delivery mechanism in place of public institutions for better targeting. It further suggested that initiatives that needed support were : facilitation in participation of Trade Fairs abroad, in acquiring Intellectual Property Rights as patents, trade marks etc. and in conducting Research & Market studies.

On augmenting flow of credit towards SSIs, FISME stressed the need of creating competition in operating environment of Banks for lending to SSIs by allowing opening of new banks both foreign and domestic exclusively for the purpose.

The Memorandum also records FISME's views on need of de-reservation of SSI sector, to increase investment limit for non-reserved items and to define Medium enterprises and urgent requirement of putting in place Insolvency mechanism for non-corporate sector ( partnerships/ prop. Companies) and speeding up of reforms in areas of labour and power.

CST CREATES EXISTENTIAL PROBLEM TO SMALL AND MICRO ENTERPRISES
By Taxindiaonline News Service

EW DELHI, 5 DEC : THE NDA Government policy to promote SSI units and micro units is nothing but a bundle of ironies. Though it has a separate Department of Small Scale Industries and never tires of making tall claims about looking after the interests of such units but it has never bothered to look at the issues which dilute its competitiveness. Take the case of VAT itself. All measures are being taken to take care of the potholes on the road to sales tax VAT but nothing has been done to either abolish or reduce the CST which badly erodes the competing potential of micro and tiny units.
Even champions of the industry interests like CII and FICCI, which have been crying hoarse over the difficulties the proposed VAT might create for the industry if certain things are not taken care of, have not yet talked about how the CST might complicate the issues for tiny units if it is not abolished.
Says Mr Dinesh Singhal, the president of Federation of Micro and Small & Medium Enterprises that the State Chief Ministers have struck a wrong 'agreement' that any review of CST Act may wait till a national consensus emerges on how to tax inter-state transactions. What is not being realised is that the existing provisions of the Act have made a serious dent into the competitiveness of SMEs which have no protective umbrella.
The fundamental problems with the SMEs are the since they are tiny in size and generally single-location units, the weightage of raw materials to the overall cost of the products is as steep as 85-90 per cent. If the unit requires to procure raw materials from neighbouring states and also supply the finished goods to buyers in other states, it results in cascading effect of the four per cent CST which finally turn out to be eight per cent for them. Take the case auto filter manufacturers who have set up shops in UP but have a large market in Delhi. So when they procure inputs from Delhi and then supply final products to buyers in Delhi, they have to bear the gigantic burden of CST twice.
The advantage with large corporates and multi-locational units is the since they have manufacturing infrastructure in different states, they procure certain state-specific raw materials locally and take care of the overall operations of the company by availing the facilities of warehousing, adds Mr Singhal.
In the light of such empirical difficulties it is high time the Union Government which seems to be hurrying up on the road to uniform VAT pays close attention to SMEs' existential problems otherwise a major segment of the Indian economy which employs a huge number of skilled and unskilled workforce might just go out of business, adding the growing woes of the unemployment market.

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Whereas twelve states have agreed to implement state VAT from 1st April 2002, the central government is dithering a decision to abolish Central Sales Tax- the biggest stumbling block in making India a common market. The decision could play havoc with competitiveness of large number of small industries, post QR regime.

According to Mr. Dinesh Singhal, President of Federation of Micro and Small & Medium Enterprises (FISME), a potently wrong 'agreement' has been struck in the meeting of the chief ministers that any revision in the CST Act may wait till a national consensus emerges for the nature of taxation of inter-State transactions. What is not being realized is the extent of damage the present CST provisions cause to SMEs and how much urgency has the matter assumed because of removal of protection for SMEs, he says .

The cascading effects of the 4% CST which is not re-batable results in erosion of competitiveness of very large number of small industries. Typically small industries have few manufacturing operations and weightage of raw material to the cost of the goods produced could be as high as 85%. If the company procures raw material from different states i.e. raw material purchase involves inter-state transactions and if goods are also being sold in different states, the effect of 4% CST rises to 7-8%.

It makes the small industries un-competitive by 4-8% in comparison to the imported products and products manufactured by large industries. Further, in direct contrast, the large industry is not affected by the current anomaly as they could avoid the cascading effect to a large extent by transferring stocks to their branch offices/ go-downs in different states. It is not surprising therefore, that neither of the apex trade bodies are raising this issue, Mr. Singhal says.

Citing the example, he says, take the case of Automobile filter which is manufactured in small scale in very large quantity catering to the local replacement markets. Assuming that a filter manufacturer is based in U.P. he procures approx. 60% worth of its raw material from other states (predominantly from Delhi) and he sells the filters thus manufactured to Delhi or other states.

A number of eminent persons have echoed the same views but these have gone unnoticed. Prof. M.C. Purohit, Prof. at the National Institute of Finance and Policy- the institute that has been instrumental in developing the draft VAT policy for the govt. and Prof. Bibek Debroy, Director if RGICS have also raised the concerns recently.

President, FISME has demanded that the Central Government and the committee of Chief Ministers needed to recognize the urgency of the matter and CST ought to be abolished a priori. In the regime of protection prior to phasing out of QRs, Government had the time to decide about CST at leisure. No more. Any delay in abolishing CST in post QR regime would play havoc for large number of SMEs, he warned.

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EXIM policy announcements
Worst fears come true; support agenda lacks details
Lifting restrictions from import of second hand capital goods welcomed

With removal of quantitative restrictions from 715 items today which includes the 169 odd items reserved for SSIs , a new era of competition is set to begin. However, the support agenda of the Govt. for industries particularly the small industries becomes conspicuous by the absence of details. Mr. Murasoli Maran failed to answer repeated questioning during the press conference about the details of the much touted 'Market Access Initiative' which stated to provide market assistance to exporters. Even the outlay for such assistance seemed to have not been decided.

Reacting to the EXIM Policy amendments announced today, Shri Dinesh Singhal, President of Federation of Micro and Small & Medium Enterprises (FISME), said that Government looked more worried about the restricting imports of cars which was announced with complete details and even a public notice was issued for the effect, than devising and announcing WTO compatible assistance schemes. Besides some procedural simplification in DEPB and advance licences etc., no concrete export promotion measure was put forwarded.

According to Shri Singhal, the amendment in the current EXIM Policy of lifting restrictions on import of second hand capital goods was a welcome step. Restricting the second hands capital goods import was proving detrimental to the technology upgradation initiatives of small industries, he said. He also welcomed the initiatives taken about the agri export processing zone and involving the states in export promotion. FISME consistently raised these two issues for two years.

On formation of the 'war room' - a standing group consisting of secretaries of commerce, revenue, SSI, AHD and the DGFT, for tracking the import of 300 sensitive items, he said that it was a principally a right step but needed to be waited and watched.

He further added that Commerce Minister's assurance that import-export data would be available within one month's time than 2-3 months, highlights India's unpreparedness in dealing the challenges of new economic order. To effectively monitor undue surge in imports and to take remedial measures, even one month is too long a period and the import-export data should be made available on-line. The ports should have been computerized on war-footing much before the lifting of QRs.

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                Excise reduction for food processing to suit MNCs at the cost of SSIs

The budget announcement of the Finance Minister Shri Yashwant Sinha that Excise exemption would be made available to the units processing vegetables and fruits will have serious fall out on over two lac Small Scale Industries.

While FISME fully appreciates the need to augment investment in the food processing sector, the current initiatives smack of 'lobbying hands at work'. The only direct benefit available to SSIs is in the form of excise exemption upto Rs. 1 crore of turnover. This benefit is chiefly used by SSIs whose raw material is not excisable which is the case for food processing units as SSIs producing industrial good opt for the CENVAT route and pay excise from start. The exemption gives the SSIs units a leeway up to 16% over their large counterparts that help them greatly in fighting competition with big brands having enormous resources.

The direct beneficiary of the decision are obviously companies like Hindustan Lever, Pepsi, Wimpy, Dabur etc.

There could have been several ways of influencing investment in the food processing sector as income tax waiver for limited period, sales tax exemption or other similar measures. Apparently alongside the clearing of way for investment, the large companies wanted the competition from SSIs to be removed and therefore stressed the excise exemption for all.

The excise exemption to all would spell doom for small units as it deprives them of their potent competitive edge. 16.5 % of the total scale units estimated at 3.5 million, are engaged in food processing as per the second II- All India Census of SSIs. Very large number of cooperative units are also engaged in the sector.

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