15 Role of Central & State Government in promoting Entrepreneurship
Monica Bansal
1. Learning Outcome:
After completing this module the students will be able to:
- Understand the concepts of entrepreneurship development
- Understand the protective and promotional measures for the growth of SSI
- Describe the importance of Central Government Incentives for Setting up Business in Backward Areas
- Understand the various financial institutions which are providing loans for the growth of the business
2. Introduction
New entrepreneurs start enterprises which are in small scale. The enterprise may a production unit or a service enterprise. In case of service enterprise the funds required for fixed investment is generally small and working capital requirement may be relatively high, whereas for a production unit the fund requirement for fixed investment as well as working capital are sizeable. There are many challenges in successfully operating a small enterprise considering its limitations on, the finances, the technology adopted, market reach, level of skill that it can employ, the quality of product or service that it can deliver etc. Small enterprise has its own advantages of quick decision, low cost of production, low investment per employment created etc. They are the backbone of the economy; hence require all the support from the government.
The output of small scale industrial (SSI) sector contributes approximately 40 per cent of the gross Industrial value-added and 45 per cent of the total exports which are from India whether direct or indirect export. Entrepreneurship is a vital source of change in all the facets of society, empowering individuals to seek opportunity where others see insurmountable problems. The entrepreneurs possess innovative and different ideas to achieve their goals and help build a better environment in their own sectors of expertise. In order to make their plans successful there are different financing programmes made available for the new entrepreneurs who are about to start their business and also for the small business growths by the government. At the same time knowing government help is available there are certain entrepreneurs who are hesitant to get assistance from the government, which may be due to the fact that they are already financial sound and can manage their resources on their own. But with so much growth happening around and risk involved in new set ups the entrepreneurs should look into the aspect of government help and shall not hesitate and taking that. The government whether central or state will immediately provide the required capital assistance through the entrepreneur grants with which the entrepreneur shall be able to achieve a successful setup.
2.1 Central Government Policies
The various central government policies are:
2.1.a GENERAL POLICIES
- Policy of Reservation
Price & Purchase Preference
Reservation of Items
- Licensing
- Trade Policy
- Foreign Investment Regulations
- Labour Policies
- Foreign Direct Investment Approval
- NRI Investment Approval
- Ministry of Steel : – Steel products standard policy for Manufacturing (Notification No- 414(E)/415(E) Dated 12/3/2012)
2.1.b INDUSTRIAL POLICIES
Priority Sector
- North Eastern Policy
- Women Entrepreneur
- Policy for Tiny Sector, Cottage & Village Industries, Handicrafts, Khadi & Handlooms
- Development of Backward Areas
Funding & Finance
- Taxation-Excise Duty
- Credit Policy
Modernization & Training
- Quality Standard Policy
Energy & Environment
- Pollution Control Measures
- Environmental Control
Government provides a lot of support for entrepreneurs who are wishing to set up their own business or who already have one. The government provides grant to those businesses that are located in areas that have low employment and very little growth in India, there are incentives being given by the state and central government. Many of the incentives are provided sector wise which are being given by the concerned ministry.
3. Benefits Given by Central Government for Setting up Business in Rural Areas
Indian central government and various state governments give numerous benefits and incentives to promote the basic manufacturing industries and for entrepreneurship development of rural areas. Both the state and central governments share the cost of some of the incentives provided. The main aims of such incentives are to develop rural and backward areas and enhance employment opportunities for local inhabitants of such areas. The following are the basic incentives:
- A subsidy at the rate of 15 per cent of the investment amount in plant and machinery is given under the capital investment subsidy scheme.
- Subsidies for transportation to promote industries in areas that are not easily accessible, like remote hilly areas. Under this scheme a subsidy of 50 to 90 per cent on transportation costs is available.
- A subsidy for interest relief is also provided at a rate of 3.5 per cent for new industrial units in some areas.
However, setting up an industry in India in the past was not an easy task because of bureaucratic requirements that needed to be fulfilled. The state and central governments have made efforts to improve some things.
4. Government Financial Institutions for providing Loans to start Industrial venture in India
Indian financial sector plays an important role in the overall development of the nation. Indian government, for the purpose of sufficient supply of credit to different sectors of Indian economy, has created a valuable structure of financial institutions in India. Depending upon the geographical coverage of their functions these financial institutions (FIs) can be classified into State level institutions and all India institutions,. At the national level, FIs provide long term and medium term loans and advances at a very genuine interest rate. Their main functions are to underwrite public issue of shares, debenture issues of companies, guarantee loans and deferred payments etc. On the other hand, the State level institutions are basically linked with the development of medium and small scale institutions and they deliver the same type of financial help at the national level institutions.
There are two main national level financial institutions which provide loans to the entrepreneurs and these are:
- Industrial Development Bank of India (IDBI): Industrial Development Bank of India aims to create a principal institution for long term finance, to provide administrative and technical support to the industries, to coordinate the institutions which are working in this field for planned development of industrial sector and to conduct research and development activities for the benefit of industrial sector.
- Industrial Finance Corporation of India (IFCI): The government established The Industrial Finance Corporation of India (IFCI) on July 1, 1948, as the first Development Financial Institution in India to deal with the long-term finance needs of the industrial sector. The newly-established DFI were given low-cost funds through the central bank’s Statutory Liquidity Ratio (SLR) which in turn enabled it to give advances and loans to the borrowers of corporate sector at concessional rates.
On the state level, loans as well as finance can be availed from:
- State Financial Corporation (SFC): Under the provision of the State Financial Corporation Act, 1952, the SFCs are established in the various states for giving loans and advances to small and medium scale industries. There are 18 SFCs operating in seventeen different states (including the Tamil Nadu Industrial Investment Corporation Ltd.) and Delhi (Union Territory). The SFCs are under the direct control of the relevant State Government and the IDBI. The SFCs have similar functions to those of the IFCI. Its main functions are to provide financial assistance in the form of advances and loans, underwriting of new issues, subscription to shares and debentures and guarantee of loans. But, in reality, they have concentrated mostly on advances and loans only. There is, therefore, a need for reorientation of their loans policy.
There are 18 State Financial Corporations (SFCs) in the country and these are:
1. Andhra Pradesh State Financial Corporation (APSFC)
2. Himachal Pradesh Financial Corporation (HPFC)
3. Madhya Pradesh Financial Corporation (MPFC)
4. North Eastern Development Financial Corporation (NEDFC)
5. Rajasthan Financial Corporation (RFC)
6. Tamil Nadu Industrial Investment Corporation Limited
7. Uttar Pradesh Financial Corporation (UPFC)
8. Delhi Financial Corporation (DFC)
9. Gujarat State Financial Corporation (GSFC)
10. The Economic Development Corporation of Goa (EDC)
11. Haryana Financial Corporation (HFC)
12. Jammu & Kashmir State Financial Corporation (JKSFC)
13. Karnatka State Financial Corporation (KSFC)
14. Kerala Financial Corporation (KFC)
15. Maharashtra State Financial Corporation (MSFC)
16. Orissa State Financial Corporation (OSFC)
17. Punjab Financial Corporation (PFC)
18. West Bengal Financial Corporation (WBFC)
- State Industrial Development Corporation (SIDC): The SIDCs came on the scene much after the SFCs. Besides giving finances, these types of institutions perform a variety of functions, viz. licenses for industrial units, arranging for land, power, roads, sponsoring the establishment of such units, especially in backward areas, etc. It also provides working capital margin to the entrepreneurs as term loan.
5. Government Schemes
The government schemes available for the industrial development of a state may be categorized as making available infrastructure at concessional or reduced rates and providing cash subsidy and incentives which amounts financial gains to the entrepreneur. These schemes are as follows:
- Loans and subsidies at very attractive rates of interest.
- Electric power supply at a reduced tariff.
- Land at subsidized prices or industrial sheds to set up small scale industrial units.
- Various tax concessions for a number of years. These may include exemption from sales tax, etc. for a set period of time.
1. Providing Assistance for Acquiring Land: In case the entrepreneur requires land in particular area suited for his type of industry, government will notify the land for industrial use and acquire it by paying compensation to the owners of the land, which may be less than the market price plus reducing the effort required to by promoter to deal with owners of the land and time involved.
2. Providing Land in Industrial Area: Government depending on its policy of dispersion of industries for uniform development of state develops industrial are by providing roads, drainage, power, water, telecommunication and civic amenities so that entrepreneurs can set up their industrial units in these fully developed industrial areas. Further certain industrial areas are developed to house specific type industries such as electronic industries, software industries, pharmaceutical industries etc., such industrial areas are equipped with facilities required by the target industries. The cost of the land in such location is at cost basis which is much less than the market price.
3. Providing shed in Industrial Estates: Government constructs industrial sheds of different sizes in the identified locations and allocates them to the entrepreneurs thus reducing the cost, time and effort involved. Such sheds are in fully developed estates/areas where roads, drains, power, water etc. are available.
4. The government schemes for making available financial incentives to entrepreneurs include the following:
(i) Providing Capital Subsidy: The government depending on its policy of dispersion of industries all over the state for all round development provides capital subsidy to make it attractive for the entrepreneurs to set up their units in backward districts of the state. Even the industrial area and sheds are developed in the backward districts or taluks of the state.
(ii) Concessions in the payment of stamp duty: In order to encourage entrepreneurs, government has given concession on the stamp duty applicable while registering the industrial land, which is a financial gain to the entrepreneurs who register the industrial land in their name.
(iii) Sales tax concessions/deferment: New industrial units were given sales exemption to the extent of twice the amount of investment made in the industrial units set up in the state. There used to be a scheme which exempts sales tax payment/remittance by the unit for a period of three years.
(iv) Interest Subsidy: The government extends interest subsidy on the loan extended to certain class of entrepreneurs such as women entrepreneurs, ex-servicemen etc. the interest subsidy is in terms of a percent or less. There are schemes which require lesser contribution from women entrepreneurs in the equity contribution.
(v) Export Subsidy: Government charges reduced interest rates for the funds involved in exports to promote export and to make the export price competitive in the market.
(vi) Funding the educational and industrial tours: The government extends subsidy and assistance to entrepreneurs to undertake tour both within the country and abroad for visiting/participating in exhibitions.
(vii) Income tax benefits: Income Tax Act, 1961 under section 80 J, new industrial undertakings including small-scale industries (SSI), are exempted from the payment of income-tax on their profits which is subject to a maximum of 6 per cent per annum of their capital employed. The exemption in tax payment is allowed for the period of five years from the date of commencement of production. In order to avail this exemption facility, a small-scale industry has to satisfy the following two conditions;
- The unit should not have been formed by the reconstitution or splitting of an existing unit.
- The unit should employ ten or more workers in a manufacturing process with power, or at least twenty workers without power.
(viii) Rehabilitation Allowance: According to the section 33 B of Income Tax Act 1961 the rehabilitation allowance is allowed to small-scale industrial units and the manufacturing small enterprises. The rehabilitation allowance is given to only those small businesses that had suffered because of the following reasons:
- Action taken in combating an enemy or action by an enemy.
- Cyclone, Flood, earthquake or other natural upheavals.
- Civil disturbance or riot, explosion or accident fire.
The rehabilitation allowance should be utilized within three years of the unit’s re-establishment reconstruction of revival for the business purposes only. This allowance is allowed to the industrial undertaking equal to 60 per cent of the amount of the deduction allowable to the enterprise.
(ix) Expenditure on Scientific Research : Following deductions in respect of expenditure on scientific research are allowed under the section 35 of the Income Tax Act 1961:
- The capital expenditure (except land) incurred on scientific research must be related to the business of the assessee, but it is subjected to the provision of section 35(2) of the Income Tax Act, 1961
- The revenue expenditure must be incurred on scientific research related to the business of the assessee in the current previous year.
- The sum that it pays to a scientific research association or a university, college, institutions or to a public company which must have its objective of scientific research.
(x) Depreciation: A small-scale industrial unit is entitled to a deduction on depreciation on block of assets at the rates which are given under section 32 of the Income Tax Act, 1961. Depreciation deduction from the actual cost of plant and machinery is allowed subject to a maximum of rupees 20 Lakhs in case of the small-scale industry. Diminishing balance method is used to calculate the amount of depreciation. In case of an asset acquired before the accounting period, depreciation is calculated on its written down value (WDV). An additional allowance called ‘Extra Shift Allowance’ is available for the plant and machinery that is used in manufacturing in double or triple shift. A small-scale industry should fulfill the various conditions before it becomes eligible for claiming the deduction in depreciation:
- This deduction of depreciation is allowed only on fixed assets, viz. building, machinery, plant and furniture.
- The asset must be used actually in the business or profession of assessee.
- The asset must be owned by the assessee.
- The income tax officer must be satisfied with all the prescribed particulars as required under section 34(1) of the Income-Tax Act, 1961.
(xi) Investment Allowance: In 1976 the investment allowance was introduced in order to replace the initial depreciation allowance. This allowance is allowed at the rate of 25 per cent of the cost of acquisition of new plant or machinery installed as per section 31A of the Income-tax Act, 1961. Actually the investment allowance has been made available for the things or the articles except certain items of low priority initially, but, according to the 11th schedule of the Income Tax Act 1961, a special dispensation has been provided for the plant and machinery installed in small-scale industries. The important condition for claiming the investment allowance that the small scale industrial unit has put to use machinery or plant either in the immediate following year or in the year of installation, falling which the benefit will be forfeited.
The schemes of the government mentioned above are illustrative only. There are various schemes which would exempt industrial units from power cut, development loans given at very nominal rate of interest etc.
6. Scope for further improvement in extending financial support to the entrepreneurs by the government
While government has been instrumental in providing credit flows to the SMEs and has made available subsidies to encourage entrepreneurs to set up their ventures in the backward areas of the country, there is scope for further improvement in extending financial support to the entrepreneurs which are listed below:
- Presently government subsidies are released over a period of time to SMEs. This can be made to set off against the taxes that are payable to the government. Thus the subsidy amount is available to SMEs as soon as they start functioning which can be used to repay bridge loan availed by them. This can also be directly remitted to the loan account of entrepreneur.
- Rope in the private sector banks to provide finance to SMEs in line with nationalized banks in respect of duration, debt equity ratio and interest rates.
- Considering the limitations of the SMEs with regard to the size, technology and the skill of the employees that they can farner etc., schemes for reimbursing the portion of tax whether sales tax or vat paid them to the government can be withdrawn up.
- Make available the concessions in excise duty on the purchase of commercial transport vehicles used for transporting employees.
- The depreciation allowance which can be up to 100 per cent needs to be increased to the level of 150 per cent, taking into consideration the inflation factor which has reached double digit. Alternatively make available a formula for computing depreciation in which factor of inflation is embedded.
- Fix a time limit for processing of loan applications of SMEs in Financial Institutions and Banks.
- Create an agency to deal with the NPAs or closed industrial units to dispose of the asset and use the proceeds to repay the dues. A time limit can also be fixed say three years for a sick unit to recover beyond which it is referred to agency for disposing the unit. Thus idle assets/funds is put to productive use.
- Attach SMEs to laboratories and institutions such as IISc, CPRI, NAL, IIMs etc., so as to enable SMEs to get technical advice, development of new products different strategy from competitive agency at a nominal amount of fee. Various Facilities available in the aided private educational institutions can also be used for this purpose.
- Provide enough funds with the banks for financing the requirement of SMEs by increasing the percentage of loans to be extended to priority sector. Allow re-appropriation only during January to ensure ear marked funds is utilized for financing requirement of entrepreneur.