What is Incentive?

The term “incentive’, generally means encouraging productivity. It is a motivational force,

which encourages an entrepreneur to take a right decision and act upon it. The objective of
providing incentives is to motivate an entrepreneur to set up a new venture in the larger
interest of the nation and the society.

Broadly, incentives include concessions, subsidies and bounties. Incentives may be financial
or non-financial. Non financial incentives push an entrepreneur towards decision and action.
Entrepreneurs in India are offered a number of incentives. These incentives normally aim at
reducing some of the problems faced by small scale industrialists.

Subsidy: Subsidy is a financial assistance or a sum of money provided by a government, to

an industry for public welfare or interest. It is any financial aid, grant, or contribution.

“Subsidy” means a single lump sum of money that is given by a Government to an

entrepreneur to cover the cost.

Bounty: The term “bounty” denotes a bonus or financial aid given to an industry to help it
to compete with other units established in country or in a foreign market.

Examples of Incentives

Industrial estates, industrial complexes, availability of power, concessional finance, capital

investment subsidy, transport subsidy, are few examples of incentives to solve constraints
faced by entrepreneurs in small scale sector.

Advantages of providing Incentives to Entrepreneurs

Following are the advantages of providing incentives to entrepreneurs.

1. Decentralization of economic power

Incentives encourages prospective entrepreneurs to take up industrial ventures and results

in decentralization of economic power in few hands.

2. Balanced regional development

Incentives are given to entrepreneurs establishing industries in backward areas. Hence, it

results in the dispersal of industries over India’s geographical area and contributes to regional
balanced development.
3. Transformation of Technology

Incentives help in the transformation of traditional technology into modern technology.

Traditional technology is characterized by low skill; low productivity and low wages,
whereas modern technology is subsequently characterized by improved skills, high
productivity, raising wages and a higher standard of living.

4. Overcomes Difficulties

The package of incentives and concessions are given to entrepreneurs for setting up units
both in backward as well as developed districts. But generally it is given for setting up units
in backward area. It is provided to offset the disadvantages prevailing in such places.

5. Generates Industrialization

Industrial policy uses incentives both to correct the market imperfections and to accelerate
the process of industrialization in the country. Regional balances can also lead to effective
utilization of regional resources, removal of disparities in income and levels of living and
contribute to a more integrated society.

6. Encourages Entrepreneurship

The new entrants in the field face many obstacles on account of inadequate infrastructures.
The new entrepreneur is supported by the government agencies through various incentives.
Being a new entrant, an entrepreneur may lack marketing and entrepreneurial skills. An
entrepreneur requires support from government agencies to compete with competitors. The
subsidies and concessions motivate the entrepreneur both financially and non financially and
promotes entrepreneurship in the country by removing economic constraints.

7. Helps to Overcome Competition

Incentives help the entrepreneur to survive and compete with the competitors. Some of the
incentives are concerned with the survival and growth of industries. Several incentives are
confined to the first few years of the establishment of the unit while a few of them are made
available over a long period.

Impotance of incentives and subsides

To Generate More Employment And Remove Unemployment:

Market Adjustments And External Economies Play A Significant Role In The Economic
Development Of A Country. Subsidies Cause The Movement Of Entrepreneurs From
Developed Areas To Developing Or Backward Areas. In Short, Incentives And Subsidies
Serve As A Catalyst To Start A Dynamic Process Of Development.
To Promote Entrepreneurship: Industrial Estates, Availability Of Power, Concessional
Finance, Capital Investment Subsidy, Transport Subsidy, Etc, Are A Few Examples Of
Subsidies That Are Aimed At Encouraging Entrepreneurs To Take Up New Ventures
To Remove Regional Disparities In Development: Industries May Be Concentrated And
Overcrowded In Some Regions, In Order To Correct This Regional Balance, Incentives Are
Provided To Entrepreneurs. They Will Start New Ventures In Such Backward Areas. Thus
The Backward Areas Become Developed And Regional Imbalances Are Corrected.
To Provide Competitive Strength, Survival, And Growth: Several Other Incentives Are
Provided For The Survival And Growth Of Industries. For Example, Reservation Of
Products, Price Preference, Etc. Will Improve The Competitive Strength. Other Concessions
Like Concessional Finance, Tax Relief, Etc., Contribute To Their Survival And Growth.

Problems Relating To Subsidies

 Subsidies May Lead To Inefficiency In The Long Run.

 Subsidies Once Introduced Are Difficult To Withdraw.
 The Administrative Procedure Must Be Effective.
 A Subsidy May Remain Unutilized.
 The Quantum Of Subsidy Should Be Adequate To Produce The Desired Results.
 The Target Groups To Whom The Subsidy Is To Benefit Should Be Clearly
Determined.
 If The Administration Is Inefficient Or Corrupt, The Subsidy Will Not Produce The
Desired Results.
 It Is Very Difficult To Measure The Impact Of Subsidies.
 The Cost Of Administering A Subsidy Should Be Considered.
 The Subsidy Scheme Should Be Communicated To Prospective Beneficiaries.
The Key Benefits And Incentives Available To Entrepreneurs In India:
1. Startup India Initiative:
 Launched By The Indian Government, This Initiative Aims To Promote
Entrepreneurship By Providing Various Benefits, Including Tax Exemptions And A
Simplified Registration Process.
2. Tax Benefits:
 Income Tax Exemptions: Startups With Eligible Criteria Can Avail Of A Three-
Year Income Tax Exemption.
 Capital Gains Tax Exemption: Profits From The Sale Of Residential Property Can
Be Invested In A Startup To Avail Of Capital Gains Tax Benefits.
 Reduced GST Compliance: Simplified GST Compliance For Startups With A
Turnover Of Up To ₹5 Crore.
3. Research And Development (R&D) Incentives:
 Tax Deductions And Credits Are Available For Businesses Investing In R&D
Activities To Foster Innovation.
4. Intellectual Property Rights (IPR) Support:
 Assistance In Protecting And Managing Intellectual Property Through Government
Initiatives And Legal Frameworks.
5. Credit Guarantee Schemes:
  Schemes Like The Credit Guarantee Fund Trust For Micro And Small Enterprises
(CGTMSE) Provide Credit Guarantees To Facilitate Easier Access To Loans For
Startups And Small Businesses.
6. State-Specific Incentives:
 Many Indian States Offer Additional Incentives, Such As Subsidies, Land At
Concessional Rates, And Infrastructure Support To Attract Businesses.
7. Export Promotion Schemes:
 Programs Like The Merchandise Exports From India Scheme (MEIS) Offer
Incentives To Encourage Exports Of Goods And Services.
8. Startup Grants And Funds:
 Various Government And Private Organizations Provide Grants, Seed Funding, And
Venture Capital To Startups With Innovative Ideas.
9. Incubators And Accelerators:
 Incubation Centers And Accelerators Offer Mentoring, Infrastructure, And
Networking Opportunities To Nurture Startups.
10. Ease Of Doing Business: – Ongoing Efforts To Simplify Regulatory Processes, Reduce
Paperwork, And Improve The Overall Ease Of Doing Business In India.
11. Skill Development Programs: – Skill India And Related Programs Aim To Enhance The
Entrepreneurial And Technical Skills Of The Indian Workforce.
12. International Collaborations: – Bilateral Agreements And Collaborations With Other
Countries Can Facilitate Access To Global Markets And Resources.
13. Investment Promotion Agencies: – Agencies Like Invest India Assist Entrepreneurs In
Identifying Investment Opportunities, Navigating Regulatory Requirements, And
Types of incentives

A. Financial incentives

1. Wage Incentives

Wages can be defined as money paid to employees in return to their services. This type of
incentive system works by increasing the basic wage or salary of an employee when his
efforts help the organisation to generate more profits.

2. Profit-sharing

The profit-sharing is an incentive method in which employees, in addition to basic salary, are
given a certain percentage of the total profit made by the organisation..

3. Co-partnership

Co-partnership is a type of incentive in which employee is given a share in management and

share in the profit. Co-partnership incentives work best because it helps in improving the
status of employees.
4. Bonus

A bonus is a one-time monetary or non-monetary incentive given to employees when they

achieve their fixed target. Bonus is given to employees after a fixed period, such as monthly,
quarterly, half-yearly, or annually.

5. Retirement Benefits

Retirement benefits are the benefits given to employees after their retirement. The examples
of retirement benefits are Gratuity, provident funds, etc.

6. Suggestion System

This type of incentive works on the principle that the opinion and suggestions of each
employee are valuable.

7. Dearness Allowance

The primary type of financial incentive is the dearness allowance. It is given to employees
along with their basic salary. It is given to employees by employers to provide them relief
against inflation.

8. Commission

This type of incentive is popularly given to sales employees. The commission incentive
works effortlessly. In addition to basic salary, the sales employees are given a commission on
every unit sold by them.

9. Fringe Benefits

There are some organizations like Google which provide fringe benefits to all its employees.
Fringe benefits can be defined as the benefits provided to employees in the form of free
children’s education, free housing facility, or free medical facility, etc.

B. Non-financial incentives

Non-financial incentives are those incentives that are not provided to employees in the form
of money. These incentives help in boosting the self-respect and ego of employees. These
incentives work on employees who like to have power and authority.

The followings are the different types of non-financial incentives

10. Discussions

It is essential to discuss everything with your employees. For example, review policies with
your employees and ask for their opinions rather than directly implementing them.
11. Competition

Competition is another non-financial incentive method to generate profits. Competition is not

exactly an incentive. But it can be utilised to make employees work hard to create more
benefits.

12. Opportunity to Progress

The opportunity to progress or promotion is similar. An employee who performs best will be
given promotion. This type of incentive works in many organizations without making any
official announcement.

13. Delegation of authority

Delegation of authority means when management gives their responsibilities and authorities
to their subordinates.

14. Participation in management

Some employees get motivated when they are given authority or power. Therefore, they feel
motivated when they are asked to participate in management’s decision-making meetings and
asked for their opinions.

15. Paid vacations

Emergencies happen in everyone’s life, and sometimes employees need vacations to get rid
of stress.

16. Knowledge of results

Employees feel dejected when they are not shared with the outcomes of projects that they
have worked hard for.

17. Proper leadership

A good leader will not only associate with employees during working hours but will also
share the happiness and grief of his subordinates. It requires skillful leadership at the end of
management to make its employees bind with the organization.

18. Appreciation

Praise is a type of incentive which costs your nothing but works wonder in case of some
employees
19. Lack of fear

Lack of fear means your employees don’t feel scared of you, or they don’t work because of
your fear.

20. Job Security

Job security comes when an employee feels secure by working with his company. Every
employee wants his job to be secure and safe. Job security makes employees do their job
worry-free.

21. Recognition

Recognition means giving the credit of the job to the deserving person. Recognition will not
only encourage them to repeat their behavior but will also help other employees to be in the
same place.

22.Fair treatment

Employees work hard when they are treated fairly. This type of incentive works for
employees who believe in performing their duties efficiently and in return expecting fair
treatment form the organization, appropriate treatment in the form of salary hike, job
promotion, and availability to opportunity.

Government Schemes and Incentives for Promotion of Entrepreneurship

 Investment subsidy to establish more enterprises. It includes various subsidies such as
capital investment subsidy, transport subsidy, power generator subsidy, and social subsidy
to women entrepreneurs.
 Other subsidies include Export / import subsidy, tax subsidy, excise subsidy/ duty
exemption, and capital subsidy for technology upgradation

Subsides service

Micro Units Development and Refinance Agency (MUDRA) Loan

The MUDRA Loan is a government subsidy for small businesses in India. It is aimed at
providing finance to micro and small enterprises in the country. This loan scheme was
launched by the Indian government in the year 2015.

2. The Credit Guarantee Fund Scheme for Micro and Small Enterprises

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) was
launched by the Government of India to provide collateral-free credit to Indian MSMEs. Both
the existing and the new enterprises are eligible for the scheme.
The Ministry of Micro, Small, and Medium Enterprises and Small Industries Development
Bank of India (SIDBI) established a trust named Credit Guarantee Fund Trust for Micro and
Small Enterprises (CGTMSE) to implement the scheme.

The scheme provides credit facilities in the form of term loans and working capital facilities
of up to Rs. 100 Lacs per borrowing unit. The amount is contributed by the Government and
SIDBI in the ratio of 4:1, respectively. The scheme also offers rehabilitation assistance to sick
units covered under the guarantee scheme.

#3. Government Subsidy For Small Business – Organic Farming

The Government of India under the National Project on Organic Farming provides a
capital investment subsidy for commercial production units manufacturing organic
fertilizers / bio-fertilizers.

NABARD/ NCDC will release the eligible subsidy amount by DAC in advance as per the
requirement. You will get a 50% advance subsidy to the participating bank for keeping the
same in the subsidy reserve fund account of the concerned borrower.

#4. Technology Upgradation Fund Scheme (TUFS) For Textile Industry

Ministry of Textiles introduced the Technology up-gradation fund scheme (TUFS) for the
textiles and jute industry in April 1999 to facilitate the induction of state-of-the-art
technology by the textile units.

It includes the benefits like 5% interest reimbursement of the normal interest charged by the
lending agency on RTL, 5% exchange fluctuation (interest & repayment) from the base rate
on FCL, or 15% credit linked capital subsidy for the SSI sector, or 20% credit linked capital
subsidy for power loom sector, or 5% interest reimbursement plus 10% capital subsidy for
specified processing machinery.

#5. Scheme for Technology Upgradation/ Establishment/ Modernization for Food

Processing Industries

This Scheme covers the following activities: Setting up/expansion/modernization of food

processing industries covering all segments viz fruits & vegetable, milk product, meat,
poultry, fishery, oilseeds, and such other agri-horticultural sectors leading to value addition
and shelf life enhancement including food flavors and colors, oleoresins, spices, coconut,
mushroom, hops.

The assistance is in the form of a grant subject to 25% of the plant & machinery and technical
civil work subject to a maximum of Rs. 50 lakh in General Areas and 33.33% up to Rs. 75
Lacs in Difficult Areas.

#6. Integrated Development of Leather Sector – Scheme for Leather Industry

The scheme is aimed at enabling existing tanneries, footwear, footwear components, and
leather products units to upgrade leading to productivity gains, right-sizing of capacity, cost-
cutting, design, and development simultaneously encouraging entrepreneurs to diversify and
set up new units.
Newly eligible units would be approved for assistance under the scheme only on submission
of a copy of all the required registration, and NOCs from all concerned Government
Departments for setting up the unit, and when the factory building is ready for installation of
plant and machinery.

#7. Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS)

Upgradation of the process as well as the corresponding plant and machinery is important to
help SMEs reduce the cost of production and remain price competitive in the global market.
To help SMEs flourish in international trade markets, the Ministry of Small Scale Industries
(SSI) runs a scheme for technology upgradation of Small Scale Industries.

Known as the Credit Linked Capital Subsidy Scheme (CLCSS), it aims at facilitating
technology upgradation by providing an upfront capital subsidy of 15% (limited to a
maximum of Rs.15 lakhs) to SSI units for credit availed by them for the modernization of
their plant and machinery. All sole proprietorships, partnership firms, co-operative, private,
and public limited companies are eligible for this scheme.

#8. Market Development Assistance Scheme for Micro, Small & Medium Enterprises

The scheme offers to fund participation by manufacturing Small & Micro Enterprises in
International Trade Fairs/ Exhibitions under the MSME India stall; sector-specific market
studies by Industry Associations/ Export Promotion Councils/ Federation of Indian Export
Organisation; initiating/ contesting anti-dumping cases by MSME Associations and
reimbursement of 75% of the one-time registration fee; and 75% of annual fees (recurring)
paid to GSI (Formerly EAN India) by Small & Micro units for the first three years for bar
code.

#9. Technology & Quality Upgradation Support for MSMEs

In an effort to increase the adoption of quality standards by the MSME sector of India,
Government provides this subsidy. Basically, this is for acquiring ISO certifications like ISO
9000, ISO 14001, and HACCP. The initiative under the NMCP aims to increase productivity,
upgrade technology, and conserve energy in the manufacturing process.

#10. Mini Tools Room and Training Centre Scheme

To assist the state, the government set up Mini Tool Rooms and Training Centres, the
Government of India provides financial assistance in the form of a one-time grant-in-aid. The
financial aid equals 90% of the cost of machinery/equipment (maximum to Rs. 9 crores) in
case a new Mini Tool Room has to be created and 75% of the cost (maximum to Rs. 7.50
crore) in case an existing room has to be upgraded.

#11. Government Subsidy for Small Business from NSIC

NSIC provides two basic subsidies. Such as raw material assistance and marketing assistance.
Raw Material Assistance Scheme aims at helping Small Scale Industries/Enterprises by way
of financing the purchase of Raw Materials (both indigenous & imported).
#12. Government Subsidy for Small Business for Cold Chain

The objective of the scheme of Cold Chain, Value Addition, and Preservation Infrastructure
is to provide integrated cold chain and preservation infrastructure facilities without any break
from the farm gate to the consumer. It covers pre-cooling facilities at production sites, reefer
vans, mobile cooling units as well as value-addition centers.

#13. Under Technology Mission on Coconut (TMOC) For Coconut Producing Units

Do you want to start a coconut-based business? Do you know there is a Government subsidy
scheme for innovative and value-added coconut-producing units in India? Under Technology
Mission on Coconut (TMOC), Coconut Development Board is providing assistance.

#14. SAMPADA Scheme for Agro-Marine Produce Processing

SAMPADA stands for Scheme for Agro-Marine Produce Processing and Development of
Agro-Processing Clusters. With a budget of Rs. 6000 Crores, the SAMPADA scheme is
aimed to integrate current and new schemes in the food processing sector.

#15. Government Subsidy for Small Business – Dairy Farming

In an effort to further strengthen the dairy farming industry in India, the NABARD dairy
farming subsidy was launched.

In addition to milk, the manure from animals provides a good source of organic matter for
improving soil fertility and crop yields.

#16. Government Subsidy for Small Business for Horticulture

National Horticulture Board (NHB) was set up by the Government of India in 1984.
Basically, it is an autonomous society under the Societies Registration Act 1860.

Seed capital assistance

Seed capital is a critical source of initial funding for startups and entrepreneurs seeking to
bring their ideas to life. It enables them to cover the costs of market testing, prototypes, and
hiring key team members.

Definition: Seed capital is the initial fund or money which is required by a

budding entrepreneur to start a new business venture. ‘Seed‘ here refers to the business
which is at the beginning stage. ‘Capital‘ refers to the money or funds required at the very
beginning of a business.

Sources of strat up seed capital

Friends and Family

The easiest way of raising fund for a startup is through family or friends since they are
familiar with the budding entrepreneur and his/her idea. However, one must be careful while
opting this source, as losing money may spoil relations with the lender.
For Example; A father withdraws his fixed deposit for seed funding his son’s startup
business.

Bootstrapping

Savings is a vital source of raising initial funds for a startup. Even the investors hesitate to put
in their money in a new business which lacks self-raised capital.

For Example; A person withdraws the amount from his bank’s savings account to start his
business.

Loans or Lines of Credit

To avail small borrowings from external sources, a budding entrepreneur may go for loans
or lines of credit from commercial banks. However, this source may require to keep personal
collateral with the lender for security.

For Example; A budding entrepreneur approaches a bank to get a business line of credit to
meet the working capital needs of the organization.

Small Business Grants

If one is lucky enough, he/she may get a small business grant from central, state or local
government or big business entities. The funds so acquired need not be repaid by the budding
entrepreneur.

For Example; In the USA, any female entrepreneur owning a startup business in the fields of
design, art, music or fashion may be awarded a grant of $15000 by the Girlboss Foundation.

Microloans

These are small business loans offered by an individual or a group of individuals at a slightly
lower interest rate for startups.

For Example; A person approaches another individual who provides money on a monthly
interest of 1%, for availing the initial capital for the new business unit.

Angel Investors

An angel investor is the one who can invest between 10K to 100K in a new business venture
only if the budding entrepreneur can convince the angel of the business idea and its
profitability

For Example; A person with a startup business in the field of robotics convinces and acquires
fund from angel investors looking forward to investing in a similar idea.

Venture Capital
Though it is the source of high capital, i.e. more than one million, it should be avoided in the
initial stage of the business. The venture capital investors look forward to owning a share in
equity along with control and decision-making power.

For Example; One of India’s leading online furniture brand Pepperfry.com acquired USD
100 million for expansion of its business in Tier III and Tier IV cities through venture capital
from Goldman Sachs and Zodius Technology Fund.

Incubators

The budding entrepreneur may avail the initial capital from incubators who not only provide
funds but also give the required training and helps develop a network for the
business. Accelerators are another similar source of funds, the only difference being that the
accelerators support the company to take a significant transformational step.

For Example; UnLtd India acts as a business incubator for the entrepreneurs engaged in
social startups in India.

Bartering

Another good option for small business organizations is the exchange of some commodity,
i.e. any goods or services for other products or services.

For Example; An interior designer wanted to purchase the latest laptop for her startup but
lacks the required money for it. The owner of an electronics store agrees to give her the
laptop in exchange for the interior designing services for his premises.

Form a Partnership

Some of the well-established business organizations invest in the new business units and
initiating a partnership with them since they find these startups to be of high potential.

For Example; A running Thai restaurant owner provides initial funding to an upcoming
Italian cafe in the nearby locality to earn a dual profit. Thus, both the parties enter into a
partnership deed.

Crowdfunding

The last one is the acquisition of initial funds from a massive group of individuals who get
attracted to the budding entrepreneur’s business idea through crowdfunding websites or
social media.

For Example; One of the most popular crowdfunded business was SkyBell Video Doorbell. It
successfully collected $600000 in 30 days on Indiegogo for their idea of sending a live video
of the person on the front gate, who rings the doorbell.

Advantages of Seed Capital for Start-ups

As we know that no business can be run successfully without the availability of the required
funds, seed capital is considered to be the backbone of any startup.
Given below are the multiple benefits of seed capital for the startup owners:

 Investors Willing to Take Risk: The most significant advantage of seed capital is that
the investors are ready to take the high risk of failure involved in the startup business.
 Usually, No-Debt Financing: Most of the times, the budding entrepreneur is not
overburdened by the debts or liability. Instead, he/she needs to give away some share in
equity to the investors.
 High Growth Prospectives: The seed capital provides financial leverage to the
startups for grabbing new opportunities and accelerate growth.
 Flexible Business Agreements: The terms of a seed funding business agreement are
negotiable and flexible, which is not the case in venture capital and bank borrowings.
 Angels Share Knowledge and Experience: In sources like an angel investor, venture
capital, incubator, partnership and accelerator, the investor takes an interest in the
business. He/she also share relevant knowledge and information with the budding
entrepreneur.
 No Monthly Fees: Many of the investors (except in case of loans and borrowings) are
interested in the ownership of the new venture rather than charging interest or monthly
fees.
 Builds Relationship, Network and Community: Some sources of funds like angel
investors, crowdfunding and incubators allow the budding entrepreneur to access their
business networks and community to build public relations.

Disadvantages of Seed Capital for Start-ups

May Lead to Diversions: Acquisition of funds for business is a time consuming, and tedious
work with diverts the entrepreneur’s attention from the underlying business operations
towards fulfilling seed capital requirement.

Loss of Control and High Interference: An investors, especially the angel investors,
exercise control over the company’s decision making and operations, in the sake of providing
guidance. This excessive involvement of the investors trouble the entrepreneurs a lot.

Giving Up Equity: The budding entrepreneurs by opting for means like angel investors,
venture capitalists and incubators may land up giving away a share of business ownership in
the form of equity and limiting the future profits for himself or herself.

Interpreting Seed Capital Acquisition as Success: Some budding entrepreneurs falsely

consider the acquisition of funds as their most significant achievement. Thus, going into a
relaxation mode when they need to perform in making their business a success.

Costly Affair Due to High-Risk Involvement: Since startups involve a high risk of failure
and loss, the investors provide funds at a high rate of interest or in exchange for a significant
business share.

Sometimes Investors Lack Expertise: In the practice of creating a diversified portfolio, the
investors sometimes put their money in less-known business, thus increasing the risk of loss.
Limits Future Profits: Since some sources of capital acquisition demand giving up of a
portion of business ownership by issuing equity shares to the investor, the budding
entrepreneur needs to share all future profits with such investors.

Investments May Not Stay Lifelong: The investors purposefully pool in their money in a
new venture. They aim at making profits, and when the business reaches a saturation point,
they tend to withdraw their investments.

Some of the tax benefits available to Small-Scale Industries in India are as follows:

Tax Holiday:

Under section 80J of the Income Tax Act 1961, new industrial undertakings, including small-

scale industries, are exempted from the payment of income- tax on their profits subject to a

maximum of 6% per annum of their capital employed. This exemption in tax is allowed for a

period of five years from the commencement of production.

A small-scale industry has to satisfy the following two conditions to avail of this tax

exemption facility:

1. The unit should not have been formed by the splitting or reconstruction of an existing unit.

2. The unit should employ 10 or more workers in a manufacturing process with the power or

at least 20 workers without power.

Depreciation:
Under Section 32 of the Income Tax Act, 1961, a small-scale industry is entitled to a

deduction on depreciation account on block of assets at the prescribed rate. Small enterprise

is allowed subject to a maximum of Rs. 20 lakh deduction for depreciation on plant and

machinery on the diminishing balance method.

A small-scale industry should satisfy the following conditions before it becomes eligible

for deduction in depreciation:

1. The assets must be owned by the assessee.

2. The assets must actually be used for the purpose of the assessee’s business or profession.
3. Depreciations allowance or deduction is allowed only on fixed assets, i.e. building

machinery, plant and furniture.

Rehabilitation Allowance:

A rehabilitation allowance is granted to small-scale industries under Section 33-B of the

Income Tax Act, 1961 whose business is discontinued on account of the following

reasons:

1. Flood, typhoon, hurricane, cyclone, earthquake, or other natural upheavals;

2. Riot or civil disturbance;

3. Accidental fire or explosion; and

4. Action by an enemy or action taken in combating an enemy.

The rehabilitation allowance should be used for business purposes within three years of unit’s

re-establishment, reconstruction, or revival .The rehabilitation allowance is allowed to the

unit equivalent of 60 per cent of the amount of the deduction allowable to the unit.

Investment Allowance:

The Investment allowance was introduced way back in 1976 to replace the initial

depreciation allowance. The investment allowance under Section 31 A of the Income Tax

Act, 1961 is allowed at the rate of 25 per cent of the cost of acquisition of new plant or

machinery installed.

Expenditure on Scientific Research:

Under Section 35 of the Income Tax Act, 1961, the following deductions in respect of

expenditure on scientific research are allowed:

1. Any revenue expenditure incurred on scientific research related to the business of the

assessee in the previous year.

2. Any sum paid to a scientific research association or a university, college, institution or to a

public company which has its object, the undertaking of a scientific research.

3. Any capital expenditure incurred on scientific research related to the business of the

assessee subject to the provision of Section 35(2) of the Income Tax Act, 1961.

Amortization of Certain Preliminary Expenses:

The Indian companies and resident persons, under Section 35D of the Income Tax Act 1961,

are allowed to write off the preliminary and developmental expenses incurred by them in

connection with the setting up of a new industrial unit or expansion of an existing industrial

unit.

The examples of preliminary expenses are:

a. Expenses incurred in connection with the preparation of a feasibility report necessary for

their business;

b. Engineering expenses related to the business; and

c. Legal charges, if any, for drafting agreements.

The writing off of the preliminary expenses is allowed against subject to a maximum of ten

annual installments beginning with the previous year in which the new unit commences its

production or expansion of an existing unit is completed. The aggregate amount of

expenditure allowed be deducted is limited to 2.5 per cent of the total cost of the project.

A small-scale unit established in a backward area, under Section 80-HH, is allowed a

deduction of 20 per cent on its profits and gains provided the unit satisfies the following

conditions:

a. The unit began its production after 31st December 1970 in any backward area of the

country;
b. It is a newly established unit in a backward area. It is neither split nor reconstituted out of a

business already in existence in any backward area;

c. It has not been formed by the transfer to a new business plant or machinery which was

previously used for any purpose in any backward area; and

d. It employs 10 or more workers in a manufacturing process with power or 20 or more

workers without power.

Tax Concession to Small-Scale Industries in Rural Areas:

The Finance (No.2) Act of 1977 inserted a new Section 80-HHA in the Income Tax Act,

1961. The tax payers, under this Section 80-HHA, are entitled to a deduction of 20 % of the

profits and gains derived by running small-scale industries in the rural areas.

The deduction is allowed for a period of 10 years from the year of commencement of

manufacturing activity after 30th September 1977. For this purpose, the expression rural area

means any area as defined under the Explanation to Section 35 CC (I) of the Income Tax Act,

1961. However, this tax deduction benefit is not allowed to the small-scale units engaged in

mining activity.

The small-scale industry can avail of this tax deduction only after fulfilling the following

conditions:

1. The small-scale unit is not formed by splitting or reconstruction of a business already in

existence.

2. ‘It is not formed by the transfer to a new business of machinery or plant previously used

for any purpose.

3. The accounts of the unit are audited by a chartered accountant.

4. It employs 10 or more workers in manufacturing process carried on without the aid of

power.
5. The unit does not claim a simultaneous deduction under Section 80-HH of the Income Tax

Act, 1961.

Tax Concessions to Small-Scale Industries in Backward Areas:

The Planning Commission of India, in 1970-71, declared 247 districts out of 435 districts as

backward areas with a view to provide them special incentives and concessions to establish

industries in these backward areas. The newly established small-scale industries in these

areas specified in the Eighth Schedule to the Income Tax Act, 1961 are entitled to a

deduction of 20% of their profits and gains from their gross total income.

This deduction is allowed for a period of 10 years beginning with the year of commencement

of manufacture or production. However, if a small-scale industry has already been established

in a non-backward area and later shifted to backward area, the unit will be allowed this

deduction on the profits earned from the undertaking after shifting in the backward area for a

period of 10 years. A small-scale industry established in backward area but engaged in

mining activity is not entitled to such deduction benefit.

The unit has to satisfy the following conditions to be eligible to avail of this tax benefit:

1. It is established on or after 31th December, 1970.

2. It employs at least 10 workers in a manufacturing process carried on with the aid of power

or at least 20 workers manufacturing process carried on without the aid of power.

Expenditure on Acquisition of Patents and Copyrights:

Under Section 35-A of the Income Tax Act, 1961, any expenditure of capital nature incurred

in acquiring a patent and copyright by a small-scale industry is deductible from its income.

But the expenditure should be incurred after 28th February 1966. The expenditure can be

deducted in 14 equal installments beginning with the previous year in which the expenditure

was incurred in acquiring patents and copyrights for the unit.

Profits from Business of Publication of Books:

Under Section 80-1A of the Income Tax Act, 1961 which has replaced Section 80-1 w.e.f. the

assessment year 1991-92, 20% of the profits earned by a small- scale industry from the

business of publication of books is deductible from its gross total income. The deduction

benefit is available for total period of five years beginning with the assessment year 1992-93.

In addition, deductions are also available in respect of:

Royalties from any company in India (Under Section 80 M)

2. Royalties from any certain foreign companies (Under Section 800)

3. Inter-corporate Dividends (Under Section 80 M)

4. Income of Co-operative Societies (Under Section SOP)

5. Carry forward and set -off business losses (Under Section 72)

MEAN EXPORT PROMOTION

Export promotion comprises all those government and non-government efforts, rules,
procedures, courses of action and techniques which are adopted to boost our exports in terms
of value as well as in volume. Thus all those measures, schemes, policies, procedures and
methods which are adopted for increasing export are known as export promotion measures.

Difficulties of export promotion

1.Technological Factors : Technological problems have very seri0US effect on India’s

exports. The Tandon Committee and Alexander Committee have referred to the adverse
‘impact of technological backwardness on India’s exports through poor quality, low
productivity, high costs, etc.

2. High Costs : In a large number of cases, high domestic costs are an inhibiting factor. This
problem has been clearly stated by Abid Hussain Committee, “India is often at a
disadvantage vis-a-vis competing countries because its costs of production, and hence export
price, are higher than in competing countries.

4. Unreliability : Besides quality, Indian exporters have been regarded as unreliable on

certain other factors. As the Tandon Committee has observed, a very important black mark on
the Indian exporters is reneging a term used in the USA to refer to going back on a contract
and refusing to fulfil it on its original terms.
5. Supply Problems : A serious drawback of the Indian export sector is its inability to
provide continuous and smooth supply in adequate quantities in respect of several products.
The problem is that much of the exporting is the result of the residual approach rather than
conscious effort of producing for export.

6. Faceless Presence Although India is an important SUpplier of several commodities in

foreign markets, her presence in these markets is faceless in the sense that the consumers do
not, know that these commodities are Indian. Major export items of India like sea-foods,
leather manufactures, spices, etc.,

7. Infrastructural Bottlenecks : Infrastructural shortages such as energy shortages,

inadequate and unreliable transport and communication facilities hinder growth in exports.
Power shortages and breakdowns disrupt production schedules, increase cost and adversely
affect timely shipments.

8. Uncertainties, Procedural Complexities and Institutional Rigidities : One of the defects of

our trade policy regime has been the uncertainty about future policies, incentive schemes
etc. The procedural complexities of the Indian trade regime have been indisputably
acknowledged

9. Inadequacy of Trade Information System : An efficient Trade Information System is

essential for success in the dynamic global market. But, “our marketing infrastructure as well
as marketing techniques are neither effective nor efficient. We do not have any machinery to
keep prompt track of business informati0n overseas, as done by JETRO in Japan, KOTRA in
Korea, CETDC in Hong Kong and STDB in Singapore with a wide network of
offices abroad.

Discuss various measures taken by Government of India for promotion of exports.

I. Export promotion refers to the policy of the govt.

II. designed to encourage the exporters to export more goods from the country than
before.
III. In the words of Sh. L. N. Mishra, Former Union Minister of Foreign Trade, “Exports
are life line and motive power for economic growth and development.”
IV. Export promotion refers to those policies and measures which can result into
maximum increase in the exports of a country.

Main objectives of export promotion comprise

I. correcting unfavourable balance of trade

II. to reduce foreign loans,
III. to achieve self-reliance
IV. export of new products
V. to defray the cost ofdefence imports, to ensure successful planning etc.
 VI. Increasing number of entrepreneurs are taking benefit of incentives and facilities
offered by the government to 100% export oriented units or units set up in Export
Processing Zones (EPZ) or Free Trade Zones (FTZ).
VII. Such units may be engaged in manufacture, software development, horticulture,
agriculture, animal husbandary etc.
VIII. In order to help entrepreneurs to promote exports oriented units, government of India
has helped the entrepreneurs to set up following types of exporting units/zones.

1) Export oriented Units : The entrepreneurs can set up unit of any type for export purpose
anywhere in the country. If the exports are 75 percent or more of production it is called
export oriented unit. Such units are allowed to import inputs without payment of import duty
and are allowed to produce for exports without payment ofexcise duty, otherwise leviable on
such goods. It provides the facility to an entrepreneur to reduce its working capital needs and
also saves the botheration first to pay the customs and excise duties and then claim refund on
that part which is exported.

(2) Export Processing Zone (EPZ) and Special Economic Zone (SEZ) : Export Processing
Zone (EPZ) is an industrial estate established by the Central Government. On the contrary,
Special Economic Zone (SEZ) is an industrial estate established by State Government. -In
both these estates, Export oriented units are established, developed and expanded.
Important facilities provided in these estates are .

(i) Plant, land and building either on purchase price at cheaper rate or on lease.

(ii) Duty free import of capital goods and equipments.

(iii) No licence needed for import. of capital goods, raw-materials, consumables, spare-parts
etc.

(iv) Export finance at concessional rate of interest.

(v) Automatic approval to proposals by the Development commissioner.

(vi) Complete exemption from income tax. Assur

(vii) ed power supply.Teleph

(viii) one, Telex, cement, steel etc. on priority basis.

(3) Establishment of Export Development Centres : A network of Export Development

Centres has been established through the Small Industries Development Organisation (SIDO)
to boost promotion of export by small scale business entrepreneurs. A number of Export
Promotion Councils have been set up to render advice on various aspects of export promotion
such as price, quality, packaging, marketing, transport, etc. It provides the following types of
assistance :

(i) Conducting market surveys.

(ii) Help ingin establishing trade contacts.

(iii) Settlement of trade disputes

(iv) Arranging trade fairs and exhibitions in foreign countries

(v) Publication of information, reports and directory Of exporters.

(vi) Administration of special export promotion schemes.

(4) Establishment of National Small Industries Corporation Ltd. (NSIC) : National Small
Industries Corporation Ltd. (NSIC) has been established as an Export House: It has adopted a
‘single window’ service approach. NSIC renders the following services to the entrepreneurs :

(5) (i) Assisting in obtaining enquiries, specifications and samples.

(ii) Assisting in development of product samples and sending them for approval of the
importers abroad.

(iii) Negotiating with foreign buyers. Handling documentation work. Rendering financial
assistance.

(iv) Arranging import of goods where ever necessary.

(v) Advance payment up to 90% of export incentives allowance.

(vi) Monitoring production and quality control. Arranging export.

(vii) Arranging deferred payment facility from EXIM Bank.

(5) Training Programmes : The govt. has also been supporting and providing assistance to
exporters for exhibiting their products in various international exhibitions. It has also
organised many training programmes on latest packaging standards, techniques etc. Not only
this, govt. providbs technical and managerial consultancy services to the entrepreneurs
through its institutions like NSIC, SIDO, TCOs, DICs etc. purposes, provision of raw-
materials, marketing support, facilities for technology upgradation etc.

(6) Help to small scale sectors in exporting : Following schemes have been formulated to
help SSI in exporting their products :

(i) Products of SSI exporters are displayed in international exhibitions and the expenditure
incurred is met by the Government. The trade enquiries generated are widely circulated;

(ii) In order to promote exports from the small-scale sector, manufacturer, exporters are given
triple weightage for the purpose of recognition as Export House Trading House/ Star
‘Trading House/ Super Star Trading House;
(iii) In order to enable SSI units to avail benefits of Export Promotion Capital Goods, imports
of jigs, fixtures, dies, moulds to be allowed för the full ie value of the licence instead of
restricting it to 20 percent;

(iv) To acquaint SSI exporters with latest packaging standards, techniques, etc., training
programmes on packaging for exports are organised in various parts of the country,
in association with the Indian Institute of Packaging;

(v) Reimbursement of expenses incurred on adopting bar coding by EAN India up to Rs.
20,000.

MEANING OF EXPORT-IMPORT POLICY

International trade plays a vital role in the economic development of a country. The policy
which is framed to regulate, control and given right direction to foreign trade is known
as ‘Export-Import Policy’. This policy is also known as commercial policy of the
country. According to Prof. Haberler, “Trade policy or commercial policy refers all those
measures which regulate external economic relations of a country. These measures are used
by such Regional or Provincial Government which has power to either obstruct or assist the
export and import of goods and services. ” Generally, trade policy and commercial policy are
used as synonymous, but in real sense both differ from each other.

TYPES OF COMMERCIAL POLICY

Commercial policy may be of following two types :

(1) Free Trade Policy : When no restrictions are imposed on imports and exports of goods
and services, it is known as free trade policy.

(2) Protectionist Trade Policy : This policy refers to that situation in which government
impose restrictions on imports and exports of goods and services. According to H. L. Hanson,
the theory of protection refers to imposition of duties on imports in order to protect home
producers of these commodities by making foreign produced goods dearer.

MAIN FEATURES OF EXPORT-IMPORT POLICY (2002-07)

With the aims to increase India’s share in world trade to one percent from 0.6 percent, the
new Export-Import Policy (2002-07) was declared to 31st March, 2002. The policy is all
about exports, Imports have already been freed of quota and licensing restrictions. The new
policy now free, easy and possibly rewarding.

Salient features of the New EXIM policy are :

(1) Encouragement to Agricultural Exports : To promote agricultural exports, following
efforts have been made by the government :

(i) All quantitative restrictions on exports except a few sensitive item, have been removed

(ii) Transport subsidy for all processed fruits and vegetable, poultry and dairy products,
wheat and rice etc.

(iii) Special preference to agricultural exports by removing exports restrictions on designated

items.

(iv) To promote export of agro-based products in the floriculture and horticulture sector have
been sustained with the notification of Agriexport rt zones across the country.

(2) Various concessions to Special Economic Zones (SEZS) : Various concessions and
facilities provided in the special economic zones are as follows :

(3) These zones are exempted from the central sales tax. Permission for setting up the
offshore banking units which will provide financial facilities at international rates

(4) Software and Hardware Sector : To promote hardware sector in the international market,
a special package has been announced for this sector. (5) Export Promotion Schemes : To
promote exports, more attractive and- flexible schemes have been launched

(6) Emphasis on Market Access : The new EXIM Policy 2002-07 give emphasis to the
widening of the scope of the market access

(7) Other Improvements To reduce transaction, customs and banks costs,

procedural simplifications have been made in the new policy.

Import Substitution

Import substitution means production of those goods which are imported from
foreign countries. Import substitution is essential for achieving self sufficiency. Import
substitution

(i) reduces imports, (ii) increases self sufficiency, (iii) source of earning valuable foreign
currency like dollar, (iv) reduces imbalance in foreign trade, (v) encourages industrial
development, (vi) creates new sources of employment, (vii) reduces foreign debts, (viii) save
local currency, (ix) reduces dependence on foreign countries, and (x) overall assistance
in increasing exports and rapid economic development of the country.

PROBLEMS OF IMPORT-SUBSTITUTION IN INDIA

Following are the main problems of import substitution in India :

(1) High Production Cost at Initial Stage: Besides the raw material, certain other cost like
interest rates, higher price of importable and non traded inputs, technological factors and
low product,civil,y contribute to the high cost, of production in India

(2) Poor Quality of Production: Poor quality and inadequacy of inputs, technology and
facilities affect the product quality. Policy of import substitution proves unsuccessful due
to poor quality products.

(3) Ignorance of Consumers: Generally, people believe that imported goods are better than
the home products. This view attracts them towards the imported goods and they do not take
interest in buying goods produced in the country

(4) Lack of Essential Resources import-substitution becomes impractical due to lack of

resources essential for production. Inadequacy of capital and raw material, backwardness of
technology create hindrance in the way of import substitution.

(5) Dampens Innovation: Critics observe that such subsidised import substitution generally
limits competition, dampens innovation and productivity growth, and keeps the country’s real
income low.

(6) Ignores Specialisation: This approach ignores the benefits of specialisation and
comparative advantage. The consumers and the entire economy might be better off if
the emphasis on import substitution were replaced by an emphasis on outward orientation.

(7) Discriminates against Agriculture: Import substitution discriminated against agriculture

and favoured industry. It led to stagnation and impoverishment in rural This, in turn, led to
migration to the cities, necessitating the ‘unproductive’ type of investments.

SUGGESTIONS TO OVERCOME PROBLEM OF IMPORT SUBSTITUTION

(1) The guiding principle, which should outweigh all whether import-substituting industries
will make a contribution to India’s economic development through efficient utilisation of
local resources and also realise foreign exchange for more essential uses.

(2) Those industries should be included in the programme of import substitution where a
clear-cut cost advantage could be established.

(3) Only those industries should be included in the programme of import substitution whose
products have adequate domestic or international demand existing or potential.

(4) Import substitution programme should be chalked out in totality rather than in terms of
fragments and the growth of selected industries should be assisted through
appropriate investment policy and promotional measures.

(5) Cost and quality control should be the keynote of future policy.
(6) Government and industries should encourage research and development to improve the
quality of goods,

MEANING OF IMPORT SUBSTITUTION

Import substitution means production of those goods which are imported from foreign
countries. Import substitution is essential for achieving self sufficiency. Import substitution
(i) reduces imports,

(ii) increases self sufficiency,

(iii) source of earning valuable foreign currency like dollar,

(iv) reduces imbalance in foreign trade,

(v) encourages industrial development,

(vi) creates new sources of employment,

(vii) reduces foreign debts,

(viii) saving local currency,

(ix) reduces dependence on foreign countries, and

(x) overall assistance in increasing exports and rapid economic development of the country.

MEANING OF EXPORT PROMOTION

Export promotion comprises all those government and non-government efforts, rules,
procedures, courses of action and techniques which are adopted to boost our exports in terms
of value as well as in volume. Thus all those measures, schemes, policies, procedures and
methods which are adopted for increasing export are known as export promotion measures. In
order to attain the objective of self-reliance every country is keenly interested to expand its
exports.

CRITICAL EVALUATION OF THE POLICY OF IMPORT SUBSTITUTION AND

EXPORT PROMOTION

The goal of self-reliance in vital sectors has been a long term objective of India since the
beginning of the planning. The goal can be attained through foreign trade policy in two ways
as given under :

1. Import substitution policy, 2. Export promotion policy.

The two broad objectives of the programme of import substitution in India were :

(a) to Save scarce foreign exchange for the import of more important goods, and
 (b) to achieve self-reliance in the production of as many goods as possible. The policy in
India has gone through various phases. Broadly speaking, we can discern three distinct
phases

(i) in the earlier phase, import substitution mostly took the form of domestic production of
Consumer goods;

(ii) in the second phase, emphasis shifted to the replacement of the import of capital goods
and

(iii) in the third phase emphasis was on reducing the dependence on imported technology by
developing and encouraging the use of indigenous techniques. As a result of the policy of
import substitution, the structure of imports has undergone significant changes.