Higher tax, weak rupee hit small enterprises in Karnataka

Hundreds of micro, small and medium enterprises (MSMEs) across Karnataka are reeling under the double impact of exorbitant value added tax (VAT) and steep depreciation in rupee value against dollar, an industry representative said Saturday.

"Due to exorbitant VAT rate (14.5 percent) in the state and weakening of the rupee against dollar and euro by 15-20 percent, we are unable to compete with our counterparts from other states, which have lower VAT rate," state MSMEs representative J. Crasta said here.

With import of raw materials and components becoming costlier due to currency volatility, Crasta said many units across the state were on the verge of closure as they were unable to hardsell their products and can't afford to pile up inventories beyond a limit.

"As VAT rates are less than five percent in the neighbouring states on similar products we manufacture, purchase orders for our goods have declined substantially during the last couple of months. It is difficult to survive in a non-level playing field," Crasta said in a statement.

The Karnataka State Small Industries Association (Kassia) urged the state government to reduce the VAT rate to eight percent from 14.5 percent so as to enable the MSMEs in the state compete with their counterparts in the domestic and overseas markets.

"OEMs (original equipment manufacturers) are purchasing components, subsystems and ancillary parts from MSMEs in other states as they are able to offer the products at a lesser price than us. Increasing overheads due to higher power tariff and logistics are also impacting our margins," Crasta argued.

State Planning and Statistics Minister S.R. Patil assured the association that he would soon take up the issue with Chief Minister Siddaramaiah, who also holds the industry and finance portfolios, for reducing the VAT rate to eight percent.

As a nursery of entrepreneurship, the MSME sector accounts for eight percent of the national gross domestic product (GDP), 45 percent of the manufactured goods and 40 percent of its exports. The sector provides employment to about 60 million people through 26 million enterprisesacross the country.