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Taxation

Taxation of Small Scale Industries

Taxation of Small Scale Industries

A small scale industry (SSI) is an industrial undertaking in which the investment in fixed assets in plant & machinery,whether held on ownership term or on lease or hire purchase, does not exceed Rs.1Crore. However, this investment limit is varied by the Government from time to time.

Entrepreneurs in small scale sector are normally not required to obtain a licence either from the Central Government or the State Government for setting up units in any part of the country. Registration of a small scale unit is also not compulsory. But,its registration with the State Directorate or Commissioner of Industries or DIC's makes the unit eligible for availing different types of Government assistance like financial assistance from the Department of Industries, medium and long term loans from State Financial Corporations and other commercial banks, machinery on hire-purchase basis from the National Small Industries Corporation,etc. Registration is also an essential requirement for getting benefits of special schemes for promotion of SSI viz. Credit guarantee Scheme, Capital subsidy, Reduced custom duty on selected items, ISO-9000 Certification reimbursement & several other benefits provided by the State Government.

The Ministry of Micro, Small and Medium Enterprises acts as the nodal agency for growth and development of SSIs in the country. The ministry formulates and implements policies and programmes in order to promote small scale industries and enhance their competitiveness. It is assisted by various public sector enterprises like :

  • Small Industry Development Organisation (SIDO) is the apex body for assisting the Government in formulating and overseeing the implementation of its policies and programmes/projects/schemes.

  • National Small Industries Corporation Ltd (NSIC) was established by the Government with a view to promoting, aiding and fostering the growth of SSI in the country, with focus on commercial aspects of their operation.

  • The Ministry has established three National Entrepreneurship Development Institutes which are engaged in development of training modules, undertaking research and training and providing consultancy services for entrepreneurship development in the SSI sector. These are :

    • National Institute of Small Industry Extension Training (NISIET) at Hyderabad,

    • National Institute of Entrepreneurship and Small Business Development (NIESBUD) at NOIDA

    • Indian Institute of Entrepreneurship (IIE) at Guwahati

  • The National Commission for Enterprises in the Unorganised Sector (NCEUS) has been constituted with the mandate to examine the problems of enterprises in the unorganised sector and suggest measures to overcome them.

  • Small Industries Development Bank of India (SIDBI) acts as apex institution for financing SSIs through various credit schemes.

In a developing country like India, Small Scale Industries play a significant role in economic development of the country. They are a vital segment of Indian economy in terms of their contribution towards country's industrial production,exports,employment and creation of an entrepreneurial base.These industries by and large represent a stage in economic transition from traditional to modern technology. Small industry plays a very important role in widening the base of entrepreneurship. The development of small industries offers an easy and effective means of achieving broad based ownership of industry, the diffusion of enterprise and initiative in the industrial field.

Given their importance,the Government policy framework right from the First plan has highlighted the need for the development of SSI sector keeping in view its strategic importance in the overall economic development of India. Accordingly, the policy support from the Government towards Small Scale Industries has tended to be conducive and favourable to the development of small entrepreneurial class. Government accords the highest preference to development of SSI by framing and implementing suitable policies and promotional schemes.

The most important promotional policy of the Government for the SSI's is fiscal incentives in the form of tax concessions and exemptions of direct or indirect taxes leviable on production or profits.

With effect from financial year 2005-06,SSIs can claim deductions in respect of profits and gains(under section 80IB of Income tax Act) at the following rates :

  • If SSI unit is owned by a company, the deduction available is 30% for first 10 years. If SSI unit is owned by a co-operative society,the deduction available is 25% for first 10 years.

  • If any other person owns SSI unit,the deduction to be claimed is 25% for first 10 years.

SSI unit can avail this tax exemption after fulfilling following conditions :
  • They should not be subsidiary of,or owned or controlled by other industrial undertakings. They should not be formed as a result of splitting up or reconstruction of any industrial undertaking/business.SSI units can manufacture any nature or type of goods,which they are permitted to do so.They should have commenced business between 1st April 1991 and 31st March 2002. They should employ atleast 10 workers in a manufacturing process carried out with aid of power or atleast 20 workers without aid of power.

  • This tax exemption from total income is allowed from the assessment year in which the unit begins to manufacture goods.

Small Scale Industries are subjected to excise duties under the Central Excise Tariff Act,1985(5 of 1986). The eligibility for excise concessions for SSIs has been based on annual turnover rather than SSI registration. SSI units having turnover less than Rs.4 crores are only eligible for concessions. Government of India has provided various concessions to SSIs by granting full exemption from payment of central excise duty on a specified output and thereafter slab-wise concessions.Thus concessions in this regard are :

  • SSI units producing goods upto Rs.100 lakhs are exempted from payment of excise duties.

  • SSI units having turnover less than Rs.60 lakhs p.a. need not have a separate storeroom for storing finished products.

  • They are not required to maintain any statutory records such as daily stock accounts, etc. Their own records are adequate.

  • SSI exemption is available for goods for home consumption as well as goods exported to Nepal and Bhutan.

Choice of streams of concessions/exemptions :
  • SSI Scheme(without CENVAT) : Units can avail full exemption upto turnover or value of clearance of Rs.100 lakhs and pay normal duty thereafter in the slab-rate of Rs.100-300 lakhs. This option can be exercised automatically. Such SSI units can avail Cenvat credit on inputs only after reaching turnover of Rs.100 lakhs. This scheme is applicable to all those units mentioned under SSI exemption notification no.8/2003-CE. This notification grants exemption in respect of basic excise duty and special excise duty. The manufacturer may opt for not availing exemption contained in this notification and instead pay normal rate of duty on the clearances. But once the option is exercised, it shall continue till the financial year ends.

  • SSI Scheme(with CENVAT) : Units can avail Cenvat credit on inputs on all its turnover. Upto the value of clearance of Rs.100 lakhs, units have to pay 60% of normal duty and thereafter for value of clearance of Rs.100-300 lakhs, they have to pay normal rate of duty. 'Assessable value' is used to calculate limit of 100 and 300 lakhs which is equal to wholesale price at factory gate, exclusive of taxes. A manufacturer can opt this option any time determining his eligibility for concession and the concessional rate of duty. While exercising this option, the manufacturer should inform in writing to the Assistant Commissioner of Central Excise with a copy to its Superintendent giving following details:(a)name and address of manufacturer; (b)Location/locations of factory/factories; (c)description of inputs used in manufacture of specified goods and its description thereafter:(d)date from which option under SSI exemption notification (No.9/2003-CE) has been exercised; (e)Aggregate values of clearances of specified goods(excluding the value of clearances not covered under SSI exemption notification)till the date of exercising the option.

Value of clearances which are not eligible for SSI concessions, that is, not covered under SSI exemption notification are as follows :

  • Clearances of the specified goods which are used as inputs for further manufacture of any specified goods within the factory of production of the specified goods

  • Clearances of strips of plastics used within the factory of production for weaving of fabrics or for manufacture of sacks or bags made of polymers of ethylene or propylene

  • Clearances of goods manufactured by SSI unit with the brand name or trade name of another person(unless goods are manufactured in rural areas)

  • Clearances of goods manufactured by SSI unit for captive consumption

  • Clearances of goods exempted under any other notification.

Procedural concessions to SSI :
  • Quarterly Return : SSI units availing concessions need not submit monthly ER-1 Return.They only have to submit quarterly ER-1 return by 20th of the following month.

  • SSI units have to pay duty by 15th of following month. They also have to pay duty in March by end of the month each year.

  • Export procedures for SSI : SSI units not covered under excise provisions have to follow simplified export procedures such as they do not have to prepare ARE-1 Form,etc.

  • Excise inspectors, officers and audit parties can visit SSI unit only with specific permission taken from Assistant Commissioner and for a specific purpose. They have to enter relevant particulars in Visitors book maintained by registered person. Normally, audit of SSI unit has to be done once in two or five years(except for units who pay duty of Rs.1 crore or above, who should be audited every year).

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Introduction

India has a well developed tax structure. The power to levy taxes and duties is distributed among the three
tiers of Government, in accordance with the provisions of the Indian Constitution. The main taxes/duties that
the Union Government is empowered to levy are:- Income Tax (except tax on agricultural income,
which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are:- Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

In the wake of economic reforms, the tax system in India has under gone a radical change, in line with the
liberal policy. Some of the changes include:- rationalization of tax structure; progressive reduction in peak
rates of customs duty; reduction in corporate tax rate; customs duties to be aligned with ASEAN levels;
introduction of value added tax; widening of the tax base; tax laws have been simplified to ensure better compliance. Tax policy in India provides tax holidays in the form of concessions for various types of investments. These include incentives to priority sectors and to industries located in special area/ regions. Tax incentives are available also for those engaged in development of infrastructure.