Does the government give help to small businesses? In what form?

This article will talk about some of the programs the government has for helping small businesses and how some may have inadvertently contributed to making India’s retail sector uncompetitive and slowing its economic growth.

This article is based on the author’s experience as an entrepreneur and B-school faculty.

The BMR direct tax for larger companies (DDT)

The BMR Direct Tax scheme is basically a tax waiver to help large companies avoid the category-wise tax exemption limits under the Companies Act, 2013.

What makes the scheme interesting is that the government has imposed a cap of ₹ 10 crores on the benefit under this scheme.

This means that businesses earning more than ₹ 10 crores in revenue qualify for this benefit. But is the policy helping the businesses in terms of attracting investments?

Overall, the answer is no. A case in point being the real estate industry.

Real estate constitutes nearly 14% of the gross domestic product of India, making it a key driver of employment and contribution to the economy.

It is safe to say that this sector is highly inefficient and hence highly incentivized to attract large sums of foreign capital.

Many of the small and medium-sized businesses have been struggling with taxation, affecting their ability to acquire capital.

This means that the government is not helping small businesses, but harming them.

Tax incentives in other sectors

Another interesting situation that emerges from a review of tax policy is that businesses in sectors where investments are more likely to come in are not getting benefits from such schemes.

One notable example of this is the liquor sector, which has been a key driver of economic growth. Liquor companies need a huge capital to set up plants, which are becoming costlier because of demonetization.

While the government has come up with the scheme BMR Direct Tax, it has decided to limit the benefit to companies who pay ₹ 2 crores in taxes per annum.

One common attribute shared by most such schemes is that they offer protection for those small and medium businesses that have been deemed to be more efficient and job-creating.

However, there is no systematic assessment or evaluation done to ascertain which businesses deserve such benefits.

There is no cause of any expenditure to measure the efficiency of a business in terms of the amount of taxes paid and the number of job creation.

One such scheme is the Small Industries Employment Guarantee Scheme (SIGES)

Launched in 1995, it was one of the earliest government programs to promote private investment in the rural sector.

The scheme offered benefits, ranging from ₹ 2,500 to ₹ 1,200 per job created for a period of five years.

The policy offers credit facilities to an accredited development organization at a nominal rate of ₹ 200 per employee for a period of five years.

This is known as the credit support component. The credit support component, along with repayment of local taxes, was meant to promote entrepreneurship in rural India.

However, only 40% of the funds were used to support rural entrepreneurship and enterprises, while the rest was either siphoned off or used for other purposes.

The scheme had no investment scheme to measure the efficiency of businesses, hence no success in reducing poverty and promoting entrepreneurship.

Income tax exemptions in the automobile sector

Another example of a policy that has received widespread support is the automobile sector policy.

Introduced in 2006, this policy introduced tax exemptions of ₹ 3.5 lakh for car purchases made up to a maximum limit of ₹ 2 lakh.

This was meant to reduce the cost of new vehicles for the Indian middle-class. The excise duty was also drastically reduced to provide a favorable environment for the sector.

However, the scheme received poor implementation from the beginning. The government had put out only one timetable for the scheme implementation, but several deadlines were not met.

The project and regional level officers did not pay due attention to the work, resulting in faulty implementation. There were huge problems with the credit release mechanism.

Given that the scheme benefits mid-sized and small car buyers who are, often, women, the department did not have enough public interface with the community to ensure effective implementation.

The policy’s local implementation suffered as the car buying process was too complex, mainly because of the inability to identify and register the intended beneficiaries.

The scheme created problems for car dealers and damaged their financials. Vehicle-related sales suffered due to the lack of new-vehicle sales.

But how do such policy and funding schemes that have failed to provide benefits for many years fit into the narrative of low-cost, populist policies that Modi has promoted?

Are they not just low-cost grants for the rich? If implemented in a participatory manner, with emphasis on monitoring and evaluation, such schemes could provide a crucial boost to inclusive growth, job creation, and poverty reduction.

A policy or funding scheme that would encourage the poor to work for a living would be an important step in this direction.