To incentivise the Micro and Small enterprises, offer them lower rates of interest based on their business turnover
As an individual, one expects the fruition of some of the promises that have been made in the past by the ruling party. On the top of the agenda for an individual taxpayer is always the downward revision of the tax slabs and more money in one’s hands given the daily demands of life.
Statistically, only 3 per cent of over 1 billion people in the country are estimated to pay income tax. The salaried class can’t manoeuvre their tax liability like their counterparts in businesses so it’s necessary to incentivise them with lower tax slabs capping them at 25 per cent instead of 35 per cent.
Those who earn Rs 21,000 and more (per month) have to pay taxes, but many small businesses, professionals (such as doctors and lawyers) and rich farmers do not pay taxes. Moreover when they buy new homes they need that extra slab of exemption for their amount of interest paid on housing loans from Rs 150,000 to Rs 250,000.
For an entrepreneur
The other important stakeholder is those that have become entrepreneurs. As we know that when you start as an entrepreneur it’s not easy to raise capital without collateral. While the new announcement to help start-ups is very encouraging we need to start incentivising entrepreneurs (start-ups and MSMEs) by giving them targeted incentives of lower rates in taxation.
Instead of charging them the same rate of taxation at par with the larger corporates, we need to consider charging them lower rates of taxation starting from 10 per cent in the 1st year and progressively up to 25 per cent in the 5th year of operations.
For the MSMEs
The other way to incentivise the Micro and Small enterprise is to offer them lower rates of interest based on their business turnover. For companies up to Rs. 5 Crs of turnover, banks need to give them rates of 7 per cent p.a. while the maximum of 10% for a turnover of up to Rs 25 crore.
While this could distort the bank lending rates and substantially reduce their Net Interest Margins, we can take solace from the fact that the amount of lending done to Micro and Small enterprises takes up a small portion of the total lending done by banks.
To increase the tax revenue
In order to compensate the above loss, we need to look at bringing more taxpayers in the ambit of taxation. While TDS, VAT and GST take care of some of the problems associated with it, we do need to look at defining a Micro or a Small enterprise by comparing how it’s done across the world.
Secondly, the real business is at the bottom of the pyramid, being the real enterprise lies in the Proprietorship firms which are through mom & pop stores. Defining them under micro enterprises and register those like we did in the case of 200 crore bank account as financial inclusion.
This will give the much needed impetus of bringing a large section of the business under the ambit of taxation. Similarly, the next large category being.
Partnership firms that need to brought in to the ambit of the corporate sector. This will also help rationalise the taxes across the spectrum.
