Small Scale Entrepreneurs Lecture Notes



Entrepreneurs whose size of business is small, their operations are also small in terms of volume. First the term ‘small scale industry’ has to be defined, followed by the problems faced by the segment.
A Small Scale Industry consists of small industrial units having investment on fixed capital not exceeding Rs. 1 crore. The Government of India has reserved 836 items exclusively for small scale production and 409 items for exclusive purchase from small scale industries. This is done in order to promote the Small Scale Sector. This sector is treated as priority sector by the banks for lending purposes. These do not include KVIC units.
Small scale units
There are thousands of small scale enterprises, but they all can be classified into main categories
 (i) Manufacturing or Industrial undertaking, and
(ii) Services.


Status of Small Scale Industrial Undertakings
(a) Ancillary industrial undertaking: An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or production of parts, components, sub-assemblies, tooling or intermediates, or the rendering of services and undertaking supplies or proposes to supply or renders not more than fifty per cent of its production or services as the case may be, to one or more industrial undertakings and whose investment in fixed assets in plant and machinery, whether held on ownership basis or on lease or on hire purchase, does not exceed rupees one crore.
(b)Tiny industries: All small scale units wherein investment on plant and machinery (excluding land and buildings) is up to Rs. 25 lakhs are classified as tiny industries.
(c) Export oriented units: All small scale units which export more than 50% of their output are classified as Export Oriented Units.
(i) Small Scale Service Business Enterprises (SSSBE): Industrial related service/business enterprises with investment on plant and machinery up to Rs. 10 lakhs, excluding land and buildings are registered under this category.

Contribution of SSIs to the growth of Indian Economy
Small scale industries play an important role in the economic growth of the country.
(i) Support large sector: But for the existence of small scale industries, large scale industries may find it difficult to operate. Small scale industries have been playing a supportive role for several large scale industries, both in public and private sectors such as Bharat Heavy Electricals Limited (B.H.E.L) and Ashok Leyland, etc.
(ii) Creates employment opportunities for Educated youth: Since it uses low technology, it is labour-intensive and thus more people are employed. This sector has employed 178.50 lakhs persons which is more than twice the employment generated by the entire public sector of the country.
(iii) Brings revenue to state in terms of sales and excise duties.
          (iv) Contributes about 35% to the country’s exports which was to the order of Rs. 53,975 crores in the year 1999-2000 of country’s total exports.
(v) Contributes significantly to the Indian economy. In the year 1999-2000, SSI have contributed Rs. 5,78,470 crores which accounted for 32% of the Gross Domestic Product.


Benefits for Small Scale Industries
Small entrepreneurs are offered a number of incentives. Such incentives are given
(i) to encourage them to take up industrial ventures
(ii) to ensure technology transfer and up gradation to ensure competitive strength; and
(iii) for attaining balanced economic growth and development resulting in regional development.
The incentives are classified into three different categories. They are:
(i) Concessions
(ii) Subsidies and
(iii) Bounties.
The term incentives mean ‘encouraging productivity’. It acts as a motivational force. Economic incentives, both financial and non-financial push an entrepreneur towards decisions and actions. Concessions are given for certain actions. Subsidy denotes a lump-sum which is given by the government to an entrepreneur to cover the cost. The term bounty denotes a bonus or financial aid given to the industry to help compete with other units in the country or in the foreign market. These terms are used interchangeably by people but their mean differently. The incentives are provided by central and state governments.
Taxation Benefits and Concessions
Taxation benefits relate to
(a) Income tax
(b) Excise Duty
(c) Sales Tax
(d) Electric Duty; and
(e) Octroi.
          Various taxation benefits are available to small business units both at the central and state levels. The central government levies direct taxes, whereas indirect taxes are levied by the state governments, provided, various benefits in sales tax, water tax, octroi duty, electricity tariff, etc.
(a) Tax Benefits under Income Tax Act
          (i) Tax Holiday: For SSI units, tax holiday under Income Tax Act to a maximum of 6% per annum of their capital employed is available. This exemption is allowed for a period of five years from the commencement of production.
          (ii) Depreciation: Depreciation is allowed up to a tune of Rs. 20 lakhs. The amount of depreciation is calculated on the diminishing balance method. For plant and machinery that are used in manufacturing in double or triple shifts, an additional allowance called “Extra Shift allowance” is allowed.
          (iii) Rehabilitation Allowance: Rehabilitation Allowance is granted to those business has been discontinued on account of flood, cyclone, earthquake, or natural calamities, and also due to riot or civil disturbance, accident, fire or explosion. The rehabilitation amount has to be used for the business purposes within 3 years of the unit’s re-establishments, reconstruction or revival.
(iv)  Investment Allowance: Investments allowances at the rate of 25% of the cost of acquisition of new plant or machinery installed is allowed.
(v) Expenditure Allowance: Deductions on any revenue expenditures incurred on scientific research related to the business in the previous year is allowed for any sum paid to any scientific research association, university, collages, institution, or public company which has its object of research.
(vi)Amortization of Expenses: Amortization of certain preliminary expenses incurred in connection with preliminary and development expense in preparation of feasibility report, legal charges, engineering expenses are allowed to be written off.
(vii)  Tax Concessions: 20% of their profits are allowed to be deduced for 10 years for SSI units from the year of commencement of business for units set up in rural areas. However, mining activity is not eligible for this concession.
(b) Excise Duty
          Modified Value Added Tax (MODEVAT) scheme for all SSI units: The MODEVAT scheme sets off excise and other countervailing duties paid on various inputs of final products. Thus, the excise tax burden is shifted from inputs to their final products which is the core of the MODEVAT scheme. MODEVAT envisages special tax benefits on inputs and final products of small scale industries.
(c) Sales Tax
          The nature and quantum of sales tax incentives vary from state to state. Concessions also vary for new and existing units. A new industrial unit is entitled to get refund of the central and state tax in the form of interest free unsecured loans for 6 to 10 years. The loan is subjected to 8% of the fixed asset. An existing unit is eligible for refund of 25 to 35% of the fixed asset.

(d) Electricity Tariff
          All SSI units having a maximum demand of 200 Kw or more in a month are eligible to claim for a rebate on electricity tariff for the first nine years from the date of commencement of production.
          Water tax: Water tax is exempted for 6-10 years for all units which lift water from public water sources.
(e) Octroi
          Octroi duty paid on capital equipment, buildings and imported raw materials is refunded. It is limited to 1.6% of the value.
Subsidies to Small Scale Industries
          The difference between concessions and subsidies is that concessions are given for certain actions, whereas in subsidies, the facilities are provided at a subsided rate, For example, if water charges are say, Rs. 250 per annum, it can be subsided for a SSI unit and made available for Rs.200.
Subsidies are available to SSI units on various aspects of their business, which are given below:
                               i.             Developed land and factory sheds at subsidized cost
                            ii.            Central and State investment subsidy
                         iii.            Interest subsidy
                          iv.            exemption of stamp duty
                             v.            Seed Capital Loan
                          vi.            Machinery purchase
                       vii.            Transport subsidy
                    viii.            Subsidy for electricity
                          ix.            Subsidy for buying testing equipment
                             x.            Subsidized water charges
                          xi.            Subsidies for market studies and consultancy services
                       xii.            Subsidies for industrial housing, etc.
Now let us look at one subsidy in detail to understand how it operates. For example, we shall study the transport subsidy scheme.
Transport Subsidy Scheme
Subsidy is granted on the transport of raw-materials and finished goods with a view to promote growth of industries vis-a-vis small scale industries.
Industrial units in the above mentioned areas will be given a transport subsidy in respect of the raw materials brought into and the finished goods which are taken out of such areas. No transport subsidy is allowed for the internal movement of raw materials and finished goods within the State. The subsidy is equivalent to 50% of the transport cost of raw materials and finished goods. Pre-registration of units with DIC is essential for such eligibility. Existing as well as new units are eligible for the subsidy.
State Incentives and Subsidies for Small Scale Industries in Tamilnadu
(i) State Capital Investment Subsidy: In addition to the Central Government, the Tamilnadu State Government also gives incentives for setting up units in backward areas.
To encourage certain specified industries like electronics, drugs, automobile ancillary, solar energy, jute processing, etc., a subsidy of 10% on the value of the assets or at the rate of Rs. 20,000 may be given.
(ii) Supply of Raw materials: SIDCO procures certain raw materials like iron and steel, coke, paraffin wax, caustic soda ash, fatty acids, etc., and supplies them to the needy SSI units. As per the norms agreed, SIDCO releases the materials every month. 
(iii)Interest free sales tax(IFST) Loan: All new small scale industries located beyond 15 kilometers of Chennai city and 8 kilometers around Coimbatore, Trichy, and Salem are eligible for this assistance. The maximum assistance available is 20% of the fixed asset or Rs. 20 lakhs, whichever is less. An application should be filed with DIC to avail this subsidy
(iv) Concessional Power tariff: Any new industry set up anywhere is given a concession in power tariff for the first five years and further 15% for units in backward regions. 30% charges of the actual energy in first year and 10% in third year are waived. An application for availing this subsidy should be submitted to DC.
(v) Seed Capital for New Entrepreneur: If a new entrepreneur wishes to private medium scale project and does not sufficient capital, IDBI offers financial assistance in the form of seed capital. It provides assistance in the form of seed capital through four schemes.
Seed Capital Assistance by IDBI
                (a)  The Special Capital Scheme operated by SFCs and smaller
                       SIDCs  
               (b)   The Seed Capital Scheme operated through SIDCs and
                       SFCs as agents of the IDBI (in exceptional cases, directly
                       by the IDBI itself)
               (c)   The National Equity Fund to entrepreneurs with feasible
                       projects, who also possess technical and managerial skills
                       but lack finance. Assistance is also given from this fund
                       for the rehabilitation of sick but potentially viable units;
                (d) A scheme for assisting ex-servicemen operated by SFCs
                   and SIDC.
We shall briefly discuss the four schemes mentioned above.
(a) Special capital Scheme: Special capital Scheme of SFCs to SSI units is given in the form of assistance. It is limited to 20% of project cost, subject to maximum of Rs. 4 lakh per project.
(b)The Seed Capital scheme: This scheme is operated through SFCs and SIDCOs. It is limited to a maximum amount of       Rs. 15 lakhs and provided in the form of interest free soft loans to proprietary or partnership firms.
(c) National Equity Fund Scheme provide support to new projects in tiny or SSI sector and for rehabilitation of sick but potentially viable units in SSI sector. The scheme is operated though public sector banks /SFSs/SIDCOs.
(d) Scheme for ex-servicemen: Under the scheme of assistance to ex-servicemen, maximum support is 1.8 lakhs per project. The minimum project cost should be Rs.12 lakhs for eligibility. Promoter’s contribution should be 10% of the project cost. Normal interest will be 1% per annum on equality assistance with a repayment period of 10 years. The D.E should be 3:1.
 In Tamilnadu, the seed capital assistance is taken up by TIIC for small units and SIPCOT for medium and large units. It is disbursed though DIC.
(vi) Subsidies in water Royalties: Subsidies in water royalties for new Industries set up in the backward areas. Payment of     Rs. 300 per annum is enough for drawing any quantity of water in the first 6 years.
(vii) Exemption in Stamp Duty: Exemption from stamp duty for the plots acquired and developed by SIPCOT in the growth centers located at Hosur,  Ranipet,  Puddukottai, Cuddalore, Gummidipoondi and Manamadurai.
Reasons for Sickness in the units of Small Entrepreneurs
             (i)    Management deficiency
             (ii)   Inadequate and non-timely availability of finance
             (iii)  Outdated technology
             (iv)  Marketing problems
             (v)   High Power and interest costs
             (vi)  De-reservation.
          
(i) Deficiency in Management:
Deficiency in management could be due to lack of education, dishonesty, rift among the promoters and partners, incompetency, over- centralization, lack of professionalism, lack of control, etc.
(ii) Inadequate and non-timely availability of finance:
                Experiencing financial crunch may be because of faulty costing, over trading, inadequate working capital, using short term funds for long terms gains, lack of discipline in financial matters, diverting funds for personal needs, lack of effective collection of debts and lack of financial planning. In any business, collection of outstanding amount is a very critical aspect which generally gets ignored, resulting in financial problems.
(iii) Outdated Technology:
                 The technology used may produce poor quality of products with low productivity. Labour problems, lack of trained and technically competent personnel may also be reasons for sickness.
(iv) Marketing problems:
 Poor services, wrong choice of markets, mismatch between product and market, dependence on single or limited numbers of customers, limited range of products are reasons for sickness. The entrepreneur will busy with the procedure of excise, sales tax, labour
problems and may not find time to visit customers and maintain a healthy business relationship. Pricing policy may also inappropriate.
(v) High Power and interest costs:
As there are frequent interruptions in power supply, even small entrepreneurs are forced to install generators. Often they are unable to bear the additional financial burden in this regard.
(vi) De-reservation:
                With the signing of WTO treaty by India, all the quantitative restrictions on imports are removed. Free import and export will be the order of the day, As per WTO norms, there should be no restrictions what so ever resulting in free movements of goods and services across the countries.
SICKNESS IN SMALL SCALE INDUSTRIES
 When a small entrepreneur is unable to overcome the problems faced by him in running his industry, his unit becomes sick. According to Reserve Bank of India(RBI), (i) a sick unit is one which incurs cash losses for one year and, in the judgement of the bank, it is likely to continue to incur cash losses for the current year as well as for the following year (ii) if the unit has an imbalance in its financial structure such as current ratio of less than 1:1 and worsening debt-equity ratio, i.e. the ratio to total outside liabilities to the net worth; and (iii) when the cumulative losses exceed capital and reserve. The emphasis is on profitability, liquidity and solvency.
Definition of Sick industry
              The Sick Industries Companies (Special Provisions) Act (SICA)defines as “an industrial company (being a Company registered for not less than seven years) which has, at the end of any financial year accumulated losses equal to or exceeding entire net worth and has also suffered cash losses in such financial year immediately preceding such financial year.  “SICA also calls a company sick if it has eroded 50% or more of its peak net worth during any of the preceding five financial years.
          State Bank of India defines a sick unit as “one that fails to generate internal surplus on a continuing basis and depends on its survival upon frequent infusion of external funds”.
Symptoms of Industrial Sickness
          The concept of industrial sickness is viewed from financial angle using cash loss as the criterion.  The performance of a unit in terms of production, marketing, etc., gets reflected on the financial performance of the unit.  The financial results of the unit are easily seen, understood and calculated also.
          Industrial sickness does not occur overnight; it is a gradual process, taking 5 to 7 years to erode the health of the unit.  At first, the cash profit gets reduced, and then working capital shortage is experiences, and subsequently the net worth.  The symptoms of sickness are
          (i)  Persisting shortage of cash.
          (ii) Deteriorating financial rations.
          (iii)  Frequent requests to banks and financial institutions for loans;
          (iv) Delay and default in the payment of statutory dues like 
                Provident Fund, E.S.I., and sales tax. Excise duty, import duty
                etc., and also
          (v) Delay in the audit of annual accounts.
          Sickness in small industries is growing rapidly in India.  There are more number of units becoming sick than new units being set up.  One out of ten SSI units is sick.  The sickness in industry has become all-pervasive in terms of ownership (public and private sector), across scale of operation (small, medium and large), across States and Industries.
Causes of Industrial Sickness
          The various causes of sickness can be classified into external and internal.  External causes are changes in the industrial policies of the Government, low demand and recession, inadequate and ultimately availability of necessary inputs like raw materials, power, transport and skilled labour, natural calamities like drought, floods etc., Internal Causes are deficiencies in various functional areas like production, finance, personnel and marketing, lab our unrest, working capital shortage, poor management, mis-match between product-market location of the unit.
Role of Bureau of Industrial Finance and Reconstruction (BIFR)
          Once a unit is declared sick, the matter is referred to BIFR to explore the possibility of revival with adequate concession and appropriate controls.  While the objective has been laudable, it has not met with much success.  The role of BIFR is only recommendatory in nature. It has no statutory powers to implement the recommendations.  The risks have to be borne by the banks and financial institutions and not BIFR.  Thus, it plays only a limited role.
Future
          In future, small scale units will survive only when they are well managed and remain focused.  More so at present because of liberal imports after India becoming a signatory to the W.T.O.  Besides, small units are also taken over by large units.

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