India’s small businesses, many hamstrung after the government removed 86% of cash in circulation last year, were this week handed some relief, with a cut in tax rates.
While India's corporate tax rate of 30% remains unchanged, Finance minister Arun Jaitley (pictured here) revealed in his budget speech yesterday that firms with an annual revenue of under 500 million rupees ($7.4m) will be subject to a 25% tax rate from April 1.
Such firms make up 96% of the 694,000 companies that filed tax returns in the 2015/16 tax year, says Jaitley. He estimates that the state will forego about 72 billion rupees ($1.1bn) in revenue per year through the reduced tax rate.
The state has also cut the rate for presumptive tax for firms with a turnover of up to 20 million rupees ($300,000) - from 8% to 6%.
Start-ups get boost
In addition the government has increased a tax holiday given to start-ups (defined as innovative firms of less than five years old and annual sales of up to $3.6m) from any three years in a five year period, to any three years in seven years.
Yet to gain access to the tax holiday firms have to get approval from the Department of Industrial Policy and Promotion. To do so they need to get an incubator or appropriate body to vouch for the firm.
Just a third of the 1,425 start-ups that have sought certification have had it approved in the year since Start-Up India was launched, shows a recent status report of the initiative.
Added to this, only eight start-ups accessed the start-up tax rebate in 2016 out of 111 applications received, according to the report (see this post on the initiative's progress).
Still a little high
India's effective corporate tax rate has been gradually falling over the last decade and a half (see the graph, above), although it's still among the highest in the world.
An OECD study of 2014 tax rates of member countries (mostly rich countries) as well as G20 countries (India, Turkey, Argentina and South Africa) found that the average small business tax rate came to 18.7% (against 29.1% for the average ordinary corporate tax rate).
The real problem however seems to be India's personal income tax collections.
A report last year by the income tax department revealed that just one percent of all Indians paid tax in the 2012/13 tax year. Despite this the number of tax payers has risen 25% between 2011/12 and 2014/15.
Growing the number of tax payers further might just give authorities the room they need to continue to lower the tax rate for small firms.
Timm is a South African who writes on small business. He visited India before the start-up boom, in 2010. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a