Impact of Taxation on Small & Medium Scale Industries

Summary

Murarji J. Vaidya’s pamphlet reproduces a public lecture delivered under the auspices of the Forum of Free Enterprise in Bombay on April 9, 1958, on the burden of taxation borne by India’s small and medium scale industries. Vaidya opens by defining the two categories — small industries (up to 50 workers with power, 100 without, capital up to Rs. 5 lakhs) and medium industries (up to 500 workers, capital around Rs. 5 lakhs) — and notes that government has never offered a formal definition of medium-scale industry, a neglect he had publicly flagged at the 1956 All-India Manufacturers’ Organisation conference. He then establishes the sector’s economic weight: organised small and medium concerns employ roughly 12 lakh workers, with another 8–10 lakh in unorganised small units, putting total employment at 20–22 lakhs — second only to agriculture, commerce and transport in national income contribution.

The core of the argument is a structured indictment of the tax regime. Excise duties, Vaidya shows, fall on the manufacturer rather than the consumer because small and medium producers lack the marketing organisation to pass costs forward, so price falls when duties rise rather than the other way around. The compounded sales tax (now combined with excise, often levied at the factory gate) compounds the squeeze, while income tax, corporation tax and wealth tax together absorb close to 60 per cent of profits of typical small and medium concerns; once provident fund, employees’ state insurance, octroi and municipal taxes are added, 90–95 per cent of profits are taken by central and local authorities, leaving owners 5–10 per cent. Vaidya also attacks the arbitrary distinction between handloom (exempted) and powerloom (heavily taxed), the restrictive lending rules of the State Finance Corporations (only against existing assets, not new capital), and the broader “drying up” of capital and finance for the sector.

The closing pages turn to who actually pays. Of 4,54,695 income-tax assessees, 3,87,518 earn below Rs. 15,000 a year — the bulk of revenue, Vaidya argues, comes from the middle class that runs precisely these enterprises. He warns that unless wiser counsels prevail and tax policy is revised at an early date, the Planning Commission’s target of employment for 11 million people by 1961 will be unmet, and the government will “have to thank themselves and their policies.” The pamphlet carries Forum of Free Enterprise pull-quotes from Eugene Black of the World Bank on the inside-front cover and from A. D. Shroff on the back panel.

Key points

• Defines small-scale industry (≤50 workers with power / ≤100 without; capital up to Rs. 5 lakhs) and proposes a medium-scale definition (up to 500 workers, capital around Rs. 5 lakhs) that Vaidya says the Government of India has never formally adopted.

• Estimates total employment in small and medium industries at 20–22 lakh workers — about 12 lakh in organised units plus 8–10 lakh in unorganised small concerns — placing the sector second only to agriculture, commerce and transport in national income.

• Argues that excise duties are effectively borne by manufacturers, not consumers, because small and medium producers lack the marketing organisation to push costs forward — prices in fact fall when excise rises.

• Documents that income tax, corporation tax and wealth tax together take roughly 60 per cent of profits of typical small and medium concerns, and that all levies combined (including provident fund, ESI, octroi, municipal taxes) absorb 90–95 per cent of profits.

• Attacks the policy distinction between exempted handlooms and heavily-taxed powerlooms — and the restriction of powerlooms from weaving sarees and dhotis — as economically incoherent given both are uneconomic instruments of production.

• Criticises the State Finance Corporations for lending only against existing assets (at half value) rather than financing new capital formation, deepening the capital squeeze on the sector.

• Shows that 3,87,518 of 4,54,695 income-tax assessees earn below Rs. 15,000 per year, meaning the bulk of the central income-tax base is the middle class that runs these enterprises.

• Warns that without an early revision of taxation policy the Planning Commission’s target of employment for 11 million people by 1961 will be missed.