Government to offer tax incentives to boost investment in SMEs

To attract more investments in manufacturing sector especially in Small and Medium Enterprises (SMEs), government is planning to exempt the capital gains tax if the profit made from sale of assets or house are reinvested for setting up a business, it is hoping that these kind of incentives in the manufacturing policy would attract more investment as well as it would also encourage people to investment in more productive assets. However, this proposal is opposed by the revenue department and the Central Board of Direct Taxes.

The committee of secretaries on new manufacturing policy is scheduled to meet on June 28 to give final outline, the new policy aims to increase the share of manufacturing sector in gross domestic product (GDP) to 25% by 2025 from the current level of 16% and generate around 100 million jobs. The senior official of the department of industry and policy and promotion (DIPP) said, 'All individuals reinvest their capital gains; so, we are proposing to give capital gains exemptions to these SMEs, and hence encourage them to put (such gains) into venture capital funds or businesses instead of locking up funds in unproductive assets like housing.”

The tax incentive is similar to that available under section 54 and 54E of the Income-Tax Act, 1961. In section 54, capital gains tax is not charged if the profits from the residential houses are used to purchase or contract another houses.

This step by the government is welcomed by the industrial bodies. The tax incentives will help in easing financial woes of SMEs, who face various problems in getting finance from the banking sectors. Apart from enterprises, if investors could avail of the exemptions when they invest in the small enterprises, this would make SMEs an attractive destination for investments and help ease the credit crunch faced by them. The proposed manufacturing policy has recommended a number of other incentives to make more finance available to SMEs. The policy has proposed capital gains tax exemption on investment in equity schemes or units of mutual funds that specifically targets manufacturing SMEs.

As per the DIPP, the tax incentives would also help curb black money generation as there won’t be any incentives left for sellers to under-report transactions. The official said, 'This is also a far better way of checking black money as it will be an incentive for people to put money into the system instead of housing.” However, according to the revenue department and CBDT, the policy is not feasible to implement, but the DIPP says investments in factories and manufacturing are foolproof unlike housing transactions, which sometimes are not certified and hence lack transparency.

At present the SMEs contribute around 9% to the nation’s GDP and account for 45-50% of exports. The SMEs is also the second largest employer after the agriculture, in 2009-10, SMEs employed around 69 million people, up by 137% from 29 million in 2005-06.