With the impact of demonetisation on the Small & Medium Enterprises (SMEs), Finance Minister is likely to provide tax cuts to boost the SMEs businesses that have faced the hardships in the past few months.

This year budget would likely be announced on Feb 01, 2017 and the government has time and again made its intentions clear about boosting the manufacturing sector. We have seen that in the last year’s budget of 2016 with the launch of Make in India initiative and introducing a lower tax rate at 25 percent for the manufacturing companies, if set-up and registered after March 1, 2016 and does not claim any tax incentives.

The Government of India has set an ambitious target of increasing the contribution of manufacturing output to 25 per cent of Gross Domestic Product (GDP) by 2025, from 16 per cent currently. India’s manufacturing sector has the potential to touch $ 1 trillion by 2025. There is potential for the sector to account for 25-30 per cent of the country’s GDP and create up to 90 million domestic jobs by 2025. India’s ranking among the world’s 10 largest manufacturing countries has improved by three places to sixth position in 2015.

To boost the manufacturing sector that can stimulate GDP growth in the coming years, Budget 2017 is expected to announce following key changes:

Investment allowance – Sec. 32AC: The government could expand the tax benefit of investment allowance to the telecom sector. Investment linked benefit has been extended to manufacturing sector on the ground that the sector contributes extensively in job creation. Indian telecom sector has been one of the key contributors to the growth of India’s economy and should also be treated at par with manufacturing sector. Further, currently this incentive is only available to companies. To boost the start-ups and Make in India initiative, this tax incentive could also be extended to taxpayers other than companies.

Exemption from capital gain for investing in start-up: In Budget 2016, the government made a positive move by exempting capital gain in case of an investment in eligible start-up . Since this section was introduced with a view to incentivise investment in the SMEs in the manufacturing sector, the benefit of exemption under section 54GB might not be restricted to capital gains from sale of residential house and plot of land alone, but could be extended to long term capital gains derived from other capital assets also.

Capital gain exemption for investing in start-up: Investment in LLP that satisfies the condition of SME company can also be considered for the purpose of such exemption. Further, the government could also ponder on increasing the time-limit for investing in new plant & machinery from 1 year to 2 years from the date the individual makes the investment in equity shares.

Tax benefit in respect of expenditure incurred outside the R&D facility: Due to the lack of infrastructure facilities within the manufacturing sector, some companies have to outsource the research & development activities. Currently, the expenditure incurred on in-house R&D facility or approved R&D facility is only allowable. The government should consider of allowing weighted deduction in respect of expenditure incurred outside the R&D facility that is related to scientific research necessitated by the business needs.

Profit linked deduction for start-ups: With the make in India initiative and the start-up revolution of businesses, for the young entrepreneurs of India, the government could boost the SMEs growth if MAT rate is lowered. As SMEs starting up and investing in manufacturing sector, initially it is very difficult for them to be profitable, thus the government should also consider raising the tax holiday period to first 5 years.

Source: Business Standard