24 Taxation Benefits to Small Scale Entrepreneurs

1. Learning Outcome:

After completing this module the students will be able to:

Understand the Taxation Benefits to Small Scale Entrepreneurs
To have the knowledge about exemption schemes available to SSI units
Describe the Schemes of CENVAT
Clear Understanding of the Benefits available under Income Tax Act
To know about the Procedure to Claim the Deductions
Knowledge about the Documents Required for Claiming the Concessions

2. Introduction

India is a developing country, the importance and role of small-scale enterprises is very significant towards employment generation, poverty eradication, rural development and creating regional balance in the promotion and growth of various development activities. 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. Particularly, the new industrial policy 1991 has given many incentives, concessions and relaxation to boost up small scale enterprises. Among such concessions one of the significant concession is that of exemption from Excise Duty.

3. Taxation Benefits Available to Small Scale Entrepreneurs

The main benefits available to Small Scale Industrial Units can be divided into two parts as shown in the following figure below:

Exemption Scheme Available to SSI
Procedural Concession to SSI

1. Exemption Scheme Available to SSI: SSI units have been given two types of exemptions:

(a) Exemption Scheme 1: A unit can avail full exemption up to 150 lakhs and pay normal duty thereafter. Such units can avail CENVAT credit on inputs only after reaching a turnover of 150 lakhs in the financial year. This concession is given by Notification No. 8/2003, dated March 1, 2003 (this Notification is popularly known as SSI exemption Notification). All industries irrespective of their investment or the number of employees are eligible for concession. In fact even a large industry will be eligible for the concession of its annual turnover is less 4 crores.

(b) Exemption Schemes 2: A unit intending to avail CENVAT credit on inputs on its entire turnover has to pay normal duty without any concession.

Procedure to Obtain Exemption Scheme 2

The first option, i.e., nil duty up to 150 lakhs and normal duty for subsequent clearance is automatic. However, if assessee wants to avail second option he has to take the following steps:

Information of choice of option: He must inform its choice of option to the department.
Supportive Information: He should inform in writing to Assistant Commissioner with a copy to Superintendent of Central Excise, the following:

Name and address of manufacturer,
Location of factories
Description of specified goods produced,
Date from which option under the SSI exemption notification has been exercised.
Aggregate value of clearances of specified goods till the date of exercising the option.

Time for availing the option: The second option is available anytime during the year but the option once availed cannot be withdrawn during the financial year.

2. Procedural Concession to SSI: Following are some procedural concessions to SSI:

(a) Quarterly Return: The SSI units availing SSI concession need not submit monthly ER-I return. They have to submit a quarterly ER-1 return.

(b) Payment of Duty: SSI units have option to pay duty quarterly.

(c) Export Procedure for SSI: The SSI units are not covered under excise provisions and have to follow simplified export procedures.

(d) Sending Material for Job Work by Exempt SSI Unit: SSI units can send its raw materials or semi-finished material to another unit for job work. Such another unit can carry out job work and return to small enterprise without payment of duty. Further processing can be done by small enterprises on these inputs and automatically clear its final product without the payment of duty when its total turnover is below 150 lakhs.

(e) Exempted Small Units from Registration: Exempted small units, having turnover below 150 lakhs, which are exempt from duty, are also exempted from provisions of registering their units with excise authorities.

(f) Visit of Officers only with Prior Approval: With the specific permission of Assistant Commissioner the audit parties, excise inspectors and preventive parties can visit small scale enterprises and for a specific purpose. The entrepreneurs have to enter relevant particulars in visitors’ book maintained by registered person.

(g) Audit: Audit of SSI units is done in two to five years. Even small units may be audited only once in five years.

Goods Not Eligible for SSI Concessions

Many of goods manufactured by SSI are eligible for the concession. However, some items are not eligible are.

Goods specifically excluded from SSI concessions: Some of the manufacturers are given below on which SSI exemptions are not applicable to even when these can be manufactured by SSI:

Tobacco products,
Pan Masala,
Matches,
Watches,
Automobiles,
Primary iron and steel, etc. are not eligible

Goods with other brand names: Goods manufactured by an SSI unit with the brand name of others are not eligible for SSI concession, unless goods are manufacture in a rural area.

Clubbing of Turnover

In the following cases turnovers are clubbed together for calculating the SSI exemption limits of 150 or 400 lakhs:

Manufacturer has more than one factory: If the manufacturer has more than one3 factory, even at different places, the turnover of all factories belonging to the same manufacturer have to be clubbed together for calculating the SSI exemption limit of 150 or 400 lakhs.
More than one manufacturer may clear the goods from the one factory: It is also possible that more than one manufacturer may clear the goods from the same factory e.g., part of factory may be used by one manufacturer and another part of same factory may be used by another manufacturer. In such cases, all clearances from the factory have to be considered even if the clearance is of different manufacturers for calculating the SSI exemption limits of 150 or 400 lakhs.
Manufacturer may use the factory for part of the year: Sometimes, a manufacturer may use the factory for one part of the year and then another manufacturer may use the same factory for remaining part of the year. In such cases, the turnover of different manufacturers has to be clubbed for calculating the SSI exemption limits of 150 or 400 lakhs, if it is from the same factory.

No clubbing of units belonging to Government, Khadi and Village Commission, etc.:

Central Government, State Government, State Industries Corporation, State Khadi and Village Industries Board, National Small Industries Corporation, State Small Industries Development Corporation or Khadi and Village Industries Commission may hold more than one factory. However, their turnover will not be clubbed and turnover of each factory will be considered separately for calculating the limit of 150/400 lakhs.

Clubbing of Turnover

Branded Goods and SSI

Brand name or trade name means any name or mark such as symbol, monogram, label, signature or invented word or writing which is used in relation to the goods for the purpose of indicating, or so as to indicate a connection between such goods and some person using such name or mark.

Provisions related to Brand Name under SSI exemption scheme are:

Goods bearing own brand name of SSI units: If the small manufacturers goods under his own brand name, SSI exemption is available to such type of SSI unit.
Goods bearing brand name of other: if the manufactured goods bear brand name of any other person then, there can be two types of situations:

Goods bearing brand name of other not eligible for exemption: If the manufactured goods bearing brand name of any other person, SSI exemption is not available. Some large units get their goods manufactured from small units under their brand name or trade mark.
Goods bearing brand name of other but eligible for exemption: Generally goods bearing brand name of other not eligible for exemption but there are some exceptions and in the following cases, the goods even bearing the brand name/trade name of others will be eligible for SSI exemption.

4. Income Tax Benefits under Income Tax Act 1961

(i) 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.

(ii) 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.

(iii) 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.

Broadly, expenditure on scientific research can be divided in the following two categories:

(A) Expenses on research activities carried on by the assessee himself

When the assessee carries on research in his own premises, he has to incur various types of expenses. Such expenses can further be divided into two parts:

(A-1) Revenue expenditure incurred by assessee himself: When an assess sets up a research laboratory of his own to carry on research which may be helpful in his business, he has to incur various types of revenue expenses and all such expenses incurred by the assessee are allowed as a deduction. Such expenses are usually on the purchase of raw material required for research, salary etc. given to workers engaged in research and such other expenses which are incidental to research activities related to assessee’s business. In case assessee is engaged in a business of textiles, so research expenses related to textiles business only are allowed.

(A-2) Capital expenditure incurred by assessee himself: Any capital expenditure incurred within three years immediately proceeding the commencement of business shall be deemed to have been incurred in the previous year in which business is concerned.

(A-3) Expenditure in in-house research: Under section 35 (2AB), a weighted deduction @ 200 per cent of the expenditure incurred on in-house research and development shall be allowed as under:

Deduction is allowed only to company assessee.
Deduction is allowed to a company engaged in bio-technology or in any business of manufacture specified in Eleventh Schedule of Income Tax Act.
Expenditure should be on in-house research
Deduction is not allowed for expenditure in the nature of cost of any land and building.

(B) Contribution to Approved Institutions

(B-I) Research carried on by any other agency, body, university, college etc. and financed by the assessee: A weighed deduction @ 175 per cent of actual expenditure shall be allowed if amount is given for research to an approved association the objective of which is to undertake research in the field of social sciences or statistical research.

(B-2) Contribution to National Laboratory: A higher weighted deduction @ 200 per cent of actual amount given shall be allowed if amount is given to an approved institution for undertaking scientific research programme approved by the prescribed authority.

(B-3) Weighted deduction for a sum of money given to a company for scientific research: In case any assessee provides money to an Indian company engaged in the scientific research and approved for this purpose, a weighted deduction @ 125 per cent of the amount paid shall be allowed. The research carried on by the company may or may not be related to donor assessee’s business.

(iv) 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 etc. Capital asset other than these shall not be eligible for deduction.
The asset must be used actually in the business or profession of assessee in the previous year. But in case the plant, machinery etc. is kept as standby to be used in case of emergency or break down, depreciation in such asset is allowed.
The asset must be owned by the assessee. Owner is that person who can exercise the rights of owner on his own behalf and he is entitled to income from such asset. Assessee cannot claim any depreciation unless he is the owner although he might be using it.
The income tax officer must be satisfied with all the prescribed particulars as required under section 34(1) of the Income-Tax Act, 1961.
Depreciation is charged on the block of asset comprising tangible assets being building, machinery or plant and the intangible assets being, know-how, patents, copyrights, trademarks, licenses etc.
The deduction of depreciation will not be allowed on assets which are sold during the year. The loss suffered due to the sale of asset, however, will be considered under short term capital gain.

(v) 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 15 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 rules for claiming the deduction of investment allowance by an entrepreneurs are:

(a) Eligible Assessee: A company engaged in the business of manufacture of an article or thing.

(b) The investment must be made in new assets as defined in section 32AC(1). The new asset excludes computers, vehicles, ships, aircrafts, office appliances and other specified assets.

(d) The above investment must be made during the period beginning from 1-4-2014 and ending on 31-3-2017. In other words, new eligible asset must be acquired and installed during the period 1-4-2014 to 31-3-2017.

(e) The newly acquired asset must not be transferred within a period of 5 years from the date of its installation.

(f) 15 per cent of the actual cost of asset acquired and installed during any of specified financial years is allowed.

(g) The deduction is available for three years i.e. 2015-16 to 2017-18. Hence, no deduction shall be available w.e.f. A. Y. 2018-19.

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.

5. Summary

India is a developing country, the importance and role of small-scale enterprises is very significant towards employment generation, poverty eradication, rural development and creating regional balance in the promotion and growth of various development activities. There is no definition of small scale industrial unit is provided under Central Excise Law. Some concessions or benefits are given by central government through notofaction (Notification No. 8/2003) and based on this, small scale industrial unit is a unit whose turnover during immediately preceding financial year was 4 crore or less. Benefits available to SSI units can be divided in to two parts i.e. exemption schemes available to SSIs and procedural concession to SSIs.

Learn More

Few important sources to learn more about Taxation Benefits to Small Scale Entrepreneurs are as follows:

Gaur VP (2015). Income Tax Law & Practice. Kalyani Publishers, New Delhi.
Sharma Sanjeet (2015). Indirect Tax Law. VK Global Publications Pvt. Ltd. New Delhi
Ahmad Khan Mukhtar (1992).Entrepreneurial Development Programmes in India. New Delhi. Kanishka Publishing House.
Janakiram B, Raveendra P.V., & Srirama V. K. (2010). Role and Challenges of Entrepreneurship Development. New Delhi-110028: Excel Books.
Prasain G. P. (2003). Entrepreneurship Development. New Delhi-110002: Jain Book Agency.
Robert D Hisrich (2007). Entrepreneurship. New Delhi. Tata McGraw-Hill Publishing Company Limited.
https://en.wikipedia.org/wiki/Indirect_tax
https://in.finance.yahoo.com/…/basics-explained–what-are-direct-and-in…
www.moneycontrol.com › News › Corporate Strategy
www.njpadvisors.com/direct-indirect-tax.html

Points to Ponder

A unit can avail full exemption up to 150 lakhs and pay normal duty thereafter. Such units can avail CENVAT credit on inputs only after reaching a turnover of 150 lakhs in the financial year.
SSI units can send its raw materials or semi-finished material to another unit for job work. Such another unit can carry out job work and return to small enterprise without payment of duty.
Clubbing is required for calculating the SSI exemption limits of 150 or 400 lakhs, if it is from the same factory.
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.
Benefits available to SSI units can be divided in to two parts i.e. exemption schemes available to SSIs and procedural concession to SSIs.
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.