2012

Entrepreneurship & management of small & medium enterprises

PRESENTED BY: GROUP PRESENTED TO: Mrs. Rupali Dabre 2/19/2012

Index
SME FUNDING

REQUIREMENT OF CAPITAL: FIXED AND WORKING

FACTORS DETERMINING CAPITAL REQUIREMENT

IMPORTANCE OF FIXED AND WORKING CAPITAL

WORKING CAPITAL MANAGEMENT

SOURCES OF FINANCE FOR SMES

TAXATION BENEFITS

INTRODUCTION Meaning
Small-scale industry comprises of a variety understandings. The definition of small scale industry(SSI) varies from one country to another and from one time another in the same country depending upon the pattern and stage of development, government policy and administrative set up of the particular country. The SSI sector in india covers a wide spectrum of industries categorized under small, ancillary small scale service and business enterprises(SSSBEs), women enterprises and cottage segments, ranging from small artisans/handicraft units on one end to modern production units with significant investments on the other.

SME funding
y Stages of SME financing
1. Stages of self-financing: Smes may be established with funds provide by the founders and their relatives or friends. This is noticed in the initial stages of development since by this time institution sources are not developed. Self-financing has several advantages including that it avoid the hasseles of complying with the terms and condition of the financial institution. People are more judicious in using their own money. 2. Stages of debt financing: When smes expand or undertake major changes, they need to obtain funds for investment for external sources. Credit institution are tradistionaly the primary source of sme growth. Among such institution, comertial banks and state level financial institution play an important role. 3. Stage of lease financing: Non banking financial institution often serve as an Important vehicle of sme financing. A tipical example is leseing companies. Through leasing contracts leasing companies accomudate financial need of sems for realestate of certain movable properties. 4. Stage leading to emergencies of equity financing: Traditionally, sem have seldom had direct access to capital market for equity financing. However recent advancement in technology coupled with financial market growth is rapidly changing scene. 5. Stage of venture capital financing: While credit is usually primarynfinancial resourses for sem to operate and invest equity capital is indispensable element in sems financing. Venture capital industry has develop an source of equity capital for smes. Venture capital industry

Requirements of capital (fixed and working)

Finance is one of the foundations of economic activity of mankind. Every part of an enterprise-production, distribution, management etc. Requires finance .finance is rightly describe as the life blood of any industrial or commercial undertaking it is needed for starting the business and also to keep it going. This means, finance is need throughout our firms life Every business organisation needs funds basically for two purpose i.e. 1. Fixed capital requirements (block capital): Fixed capital required by the company for a period of time. It is capital without which the business of the company cannot run. Fixed capital is part of the total capital of company and is used for buying fixed assets like land and building, plant and machinery , furniture and fixtures, computer equipments etc. these assets are acquired for permanent use in the business and not for resale, that is, for a long period of time.

2. Working capital requirement (circulating capital) : Working capital also called as circulating capital or short term capital, is the capital required for meeting regular, recurring and day-to-day expenses of a business organisation. It is required for the purchase of raw materials and stores, payment of wages and other expenses like electricity, water charges, taxes etc. Working capital is that part of total capital of a company which is required for purchasing current assets. It consists of funds invested in current assets. There are two concepts of working capital i.e. Gross Working Capital and Net Working Capital. Gross working capital is the total of all current assets. Net Working Capital is the difference between current assets and current liabilities. In other words, net working capital = current assets - current liabilities throughout the existence of the company. Temporary working capital varies with the level of activities undertaken by the company.

FACTORS DETERMINING CAPITAL REQUIREMENT Factors determining fixed capital requirements :

The factors determining or influencing fixed capital requirements are as follows : 1. Nature of business : The requirement of fixed capital to be invested differs from industry to industry. The manufacturing enterprises require larger proportion of fixed capital in the forrii of latid, building, plant, machinery, furniture etc. which are required for carrying out manufacturing activities. Public utility concerns like railways, require a larger fixed capital for purchase of land, laying of track, buying rolling stock, railway stations, workshop etc. Concerns engaged in rendering personal services, merchandise, trade or commerce usually require comparatively much lesser fixed capital. 2. Types of Products : The type of products produced is also one of the important factors of fixed capital. If a standard product is to be produced with standard men, machines and materials, larger amount of fixed capital would be required. Manufacturing of technical types of goods or capital goods require larger amount of fixed capital as compared to consumer goods. 3. Size of the firms : The size of the firms influences the quantum of fixed capital. The biggei the size of the plant, the larger would be the fixed investment. A smaller sized firm with limited scale of operations would require lesser fixed capital. 4. Diversity of production lines : This is also one of the important factors which govern the fixed capita requirements. If a concern is engaged in manufacturing and marketing, then i requires larger fixed capital. If its business is merely to procure the already manufactured goods and to market them, much less fixed capital would be required. 5. Method of handling production : This factor also influences the amount of its fixed capital. If the firm is engaged in assembling the parts manufactured by other industries, its fixed capital requirements

will be lesser compared to the firm which integrates all the sequences of manufacturing activities. 6. Method of acquiring the fixed assets : Larger fixed capital is required for purchasing land, constructing building, acquiring plant and machinery on ownership basis. If the land and building are taken on rental basis or if plant is acquired on lease, then naturally lesser amount of fixed capital would be required. 7. Technique of production : The technique of production also affects the amount of fixed capital. A firm using capital-intensive techniques requires more fixed capital than another firm of the same size using labour-intensive technology. Shifts in technology lead to changes in the amount of fixed capital. 8. Type of the industry : Due to the inherent nature of some industries, any company belonging to such industries cannot be started on a small scale business. Hence, the fixed capital requirement is more. Petrochemicals, oil exploration, mining, automobile etc. cannot be started on a small scale business. 9. Government subsidy : The Government of India offers various incentives in the form of subsidies for an organisation to start its activities in backward areas. So if the organisation starts the activities in backward areas, the amount of fixed capital required is less as certain assets like land are made available at subsidised rates. 10. Subcontracting facility : If the company decides to sub-contract some of its production activities, it may require lesser fixed capital e.g. if the company hands over the grinding work to some outside agency, it may not be necessary for it to invest in assets like grinding machines, as a result of which, the fixed capital requirement would be less.

Factors Determining Working Capital Requirements

The factors determining working capital needs oT a business firm are as follows : 1. Size of the firm : A large firm needs more working capital th'aTi a small firm. In order to sustain the high volume of production and sales, a large firm has to maintain greater current assets. 2. Nature of Business : A trading concern has to maintain more inventory than a manufacturing concern. Therefore, more working capital is required by a trading concern. Public utility concerns such as railways, electricity supply concerns, gas agencies require less working capital because most of their transactions are on cash basis. Similarly, hotels and restaurants need little working capital as stock and debtors are not high. 3. Type of Production Process : A firm using labour intensive technique needs more working capital to pay wages and salaries. A highly automatic plant will need less working capital and more fixed capital. Working capital requirements are higher when raw materials account for a major proportion of the total cost. 4. Length of Operating Cycle : Longer is the time gap between purchase of raw materials and receipt of cash from debtors, greater is the need for working capital. That is why firms having a lengthy and roundabout manufacturing process require more working capital. For example, a heavy engineering firm has a longer operating cycle than a rice mill. 5. Inventory Turnover : Where the inventory is large and its turnover is slow, working capital required is more. Inventory turnover means the speed with which sales are made. For example, a jeweller has to maintain a high inventory of different types of jewellery and the movement of inventory is slow. Therefore, the working capital requirements of a jeweller are more than those of a grocer.

6. Terms of Credit : An enterprise with a liberal credit policy require more working capital. Such a firm allows credit to all its customers, the period of credit is comparatively long and debts are not collected strictly within the credit period. Similarly, a concern enjoying liberal credit from the suppliers need less working capital. 7. Banking facilities : Where good, quick and dependable credit is available from commercial banks, a concern cafc manage its operations with relatively less working capital. In such a case, cash requirements are small. 8. Seasonal variations : Some enterprises need greater working capital during particular seasons. For example, a sugar mill requires more working capital during December to April when production takes place. It requires much less working capital in other months. 9. Contingencies : If the demand for and prices of products of a small enterprise are subject to wide and unexpected fluctuations, provision has to be made for arranging higher amounts of working capital. Trade cycles may affect the amount of working capital required in an enterprise. 10. Terms of purchase and sale : If the firm purchases raw materials and other needs on credit and sells on cash basis, it requires less working capital. If it buys on cash basis and sells its product on credit, it will need a large amount of working capital because of instant payments and slow collections. 11. Importance of labour : If the project is labour intensive, large amount of working capital is required. 12. Production Policy : If the production is evenly distributed throughout the year, rather than intensifying the production during certain periods will reduce the requirement of working capital.

13. Cost of raw materials : If the raw materials required by the company are costly, the requirement of working capital is naturally high. 14. Regular Availability of Raw Materials : If the raw materials are available throughout the year, the company need not purchase large quantity of raw materials and keep it for a long time. Those type of companies require less amount of working capital. In case, raw materials are scarce, it has to be stored for long. 15. Dividend Policy of the Management : If the management is liberal in declaring dividend, the level of working capital will be reduced on account of outflow of cash. Some firms which pay high rate of dividend inspite of less earnings, need more working capital. 16. Expansion and Diversification : When the company expands its volume of production or diversifies into production of more goods, there will be greater need for raw materials, labour etc. which increases its working capital requirements. 17. Degree of Competition : The degree of competition prevailing in the market also affects working capital needs. If competition is severe, more working capital is required because large amount has to be spent on advertising and sales promotion. Large amount of stock has to be kept to serve promptly the customers. The customers may ask for longer credit period. All this requires more working capital.

IMPORTANCE OF FIXED AND WORKING CAPITAL

Importance/Significance of Fixed Capital
Every business organisation requires fixed capital for various purposes. It is required to start an organisation and to keep it going. Adequate fixed capital is required for the success, survival, stability and growth of a business organisation. The importance of fixed capital is as follows : 1. Promotion of an enterprise : To promote an enterprise, the promoter require fixed capital to meet various promotional expenditure like payment for project studies, to meet preliminary expenses, to acquire intangible assets like goodwill, patents, trade marks and to purchase fixed assets like land and building, plant and machinery, furniture and fixtures etc. 2. Expansion and Diversification : Adequate fixed capital is required for expansion f and diversification of business activities of a company. To expand and diversify the business, the firm needs substantial amount of investment in fixed assets, for which fixed capital is required. 3. Automation : Introduction of automation needs huge amount of fixed capital. Fixed capital is required to purchase automatic machines and other requirements. 4. Replacement of obsolete/outdated assets : An organisation needs to replace obsolete assets such as worn out plant and machinery, furniture and fixtures etc. in order to increase the efficiency and productivity of the company. Timely replacement is required for increasing the efficiency of the organisation. Sufficient fixed capital is required for replacement of outdated fixed assets. 5. Continuous upgradation of technology : It is necessary to continuously upgrade the technology used for production. Latest technology is costly. An organisation would be in a position to acquire such technology only if it has adequate fixed capital. Continuous upgradation is required for

staying ahead of competition. Modernisation is necessary to increase efficiency and productivity. 6. Production and Distribution : A firm which is engaged in production activity also wants to enter into distribution activity, may require additional fixed capital to meet distribution needs. A company which was depending upon external sources to supply some of the components or parts, wants to undertake its complete requirements, may need additional amount of fixed capital.

The importance of working capital is as follows :

1. Continuity in Business Operations : A business unit needs adequate or sufficient and continuous supply of raw materials. This is possible when the organisation has adequate working capital. Working capital helps in making timely payment to suppliers and enables an organisation to pay day to day expenses such as salaries, power, rent, etc. Thus, a regular flow of working capital helps in maintaining continuity in business operations. 2. Regular Dividend Payment : Dividend payrnent involves outflow gf cash. Shareholders who are the owners expect regular payment of dividend and reasonable dividend. Regular dividend payment is possible if an organisation has adequate working capital. 3. Goodwill : Adequate working capital ensures timely payments. This enables an organisation to earn goodwill in the market. Goodwill enables an organisation not only to survive but also to grow in this competitive business environment. 4. Increases Creditworthiness : An organisation having adequate working capital can make timely payments and enjoy a good name in the credit market. Thus, an organisation can get better terms of credit from the suppliers of raw materials and loans and advances from banks. The dealers are willing to advance money to the company. 5. Face Competition :

Adequate working capital enables an organisation to face market competitions. It can undertake advertising and sales promotion campaigns. It can give longer credit terms to the customers. 6. Withstand seasonal fluctuations : Working capital is required throughout the year. Certain products have a seasonal demand. During low sales period, cash inflow is less. Thus, liquid funds are required to pay wages and other expenses. Thus, adequate working capital helps to withstand seasonal fluctuations or variations.

7. Increases Efficiency and Productivity : Adequate working capital enables an organisation to make timely payment of wages and salaries to employees. It ensures good working conditions and welfare facilities to employees. The company can afford to spend on training and development of the personnel. This increases the efficiency and productivity of the firm. 8. Repayment of long-term loans : Working capital is used to pay instalments and interest of long-term loans and debentures. Adequate working capital helps in timely repayment of long-term loans and debentures and also the interest on them.

Working Capital Management

Working capital represents current assets minus current liabilities. Current assets refer to those assets, which are used for day-to-day business operations of the firm. The current liabilities represent that part of obligations, which the firm has to clear to the outside parties within a short period, normally a year. The current assets include cash and bank balances, sundry debtors, inventories, short-term investments, prepaid expenses and short-term loans and advances given by the firm. The current liabilities include bank overdraft / cash credit, short-term loans, provision for taxation, dividend and contingencies and sundry creditors. Working capital management refers to management of current assets and current liabilities. Working capital management refers to all aspects of the administration of both current assets and current liabilities. The basic objective here is to manage the firm's currents assets and current liabilities in such a way that a satisfactory level of working capital is maintained i.e. it is neither adequate nor excessive. If the current assets are not sufficient to cover the current liabilities, the liquidity of business is affected and there is no safety margin. On the other hand, if the working capital is excessive, firm's profitability is affected. It is also necessary that different components of working capital are properly balanced. For example, firm's liquidity will be low despite sufficient working capital, if the amount of slow moving/obsolete inventory is very high. The management of differed components of working capital is as follows : 1. Cash Management : It is necessary to maintain adequate cash to pay current liabilities and to meet unexpected contingencies. At the same time, idle cash should be avoided as it means loss of income. Cash management involves (a) Controlling the cash level through cash budgeting, cash flow statement, contingency arrangements with banks etc. (b) (c) (d) Controlling cash inflows through decentralised collection of book debts, etc. Controlling cash outflows through centralised disbursement etc., and Investing surplus cash appropriately.

2. Inventory Management : Inventory forms the largest part of the total current assets. Ineffective management of inventory may create problems for the company and it may face working capital crunch. Therefore, there must be proper inventory management. Slowmoving items must be minimised, fast-moving items must be increased to achieve faster inflow of cash and obsolete items must be periodically eliminated. 3. Accounts Receivable (Debtors) Management : Accounts receivable constitute a significant portion of current assets. A firm sells goods on credit to increase the sales volume. But, it involves loss of interest and risk of bad debt. The objective of debtors management is to ensure that the cost involved in financing book debts does not exceed the income from investment in book debts. The size of accounts receivables depends on the level of credit sales, credit period, terms of credit, cash discount offered, efficiency of collection. In order to minimise investment in accounts receivable, without sacrificing the firm's competitive position, it is necessary to lay down specific credit standards, to adopt a sound credit policy and to adopt sufficient collection procedures. 4. Accounts Payable Management : Need for working capital can be reduced by obtaining liberal terms of credit from suppliers, While managing accounts payable, the saving of interest cost through delayed payments should be offset against loss of credit standing of the firm. 5. Purchase Management : .

Purchase of materials, payment for overheads etc. f result in outflow of cash. For effective working capital management, the cbmpany has to avail maximum credit facility from its suppliers. Similarly, if the overheads are paid after a period, the working capital requirement can be reduced. 6. Investment Management : The surplus funds available with the company should be invested in short term securities so that return is available. The surplus funds can be invested in short term fixed deposit of banks, mutual funds, RBI bonds, certificate of deposit issued by banks, commercial paper with corporate firms and inter-corporate deposits.

SOURCES OF FINANCE FOR SMES

The sources of fixed capital:
1. Equity Shares : Many companies collect a huge amount of fixed capital through the issue of equity shares. Equity shares represent ownership capital. This fund is available for a long period of time. It is repaid only when the coflapa$y^closes its operations. Hence it is the best source of financing fixed capital. 2. Preference Shares : Fixed capital can be collected by issue of preference shares. These shares get a preference regarding payment of dividend and repayment of capital. They are preferred by cautious investors. 3. Rights issue of Shares : This is a method of raising further funds from existing shareholders by offering additional shares to them. 4. Private Placement of Shares : This is a method of raising funds from a group of financial institutions and others who are ready to invest in the company. 5. Debentures : Debenture capital is also an important source of raising funds. Debentureholders are creditors of the company. Since debentures are more secured they are preferred by the investors. Debentureholders get regular interest. Different types of debentures are issued for the convenience of the investors. 6. Term Loans : The company may also obtain term loans from banks and financial institutions like IDBI, ICICI and so on. Term loans are repayable by instalments over a long period. They can be used for purchasing fixed assets and for financing expansion programmes of the company.

7. Retained Earnings : They are the undistributed profits of the company. They are an internal source of financing. If need arises, the organisation can issue bonus shares and thereby convert reserves into permanent capital. Retained earnings can be used for expansion programmes, at the time of replacements or for purchasing additional fixed assets. 8. Lease financing : It is a new method of financing long-term assets. Finance and leasing companies helps the firms by providing machinery, equipment etc. on lease basis. The firm can use the machinery and equipment and pay rent for the use of the same to the Jeasincj company. Lease financing relieves the firm from the botheration of huge investment in fixed assets. 9. Venture capital : It is a form of equity financing by specialised institutions to high risk and high reward projects in hi-technology IT sector and R & D projects. In India, venture capital funds are operated by various institutions like IDBI, SIDBI, ICICI, etc.

Sources of Working Capital

The important sources of working capital are as follows : 1. Trade Credit : Trade credit means the credit given by the supplier of goods and services. It is an important form of short-term financing, as it represents generally 25% to 50% of the working capital needs. The suppliers while granting credit consider the earning record over a period of time, liquidity position of the firm to meet its obligations and past payment record. 2. Accruals : Expenses due but not paid are called accruals. The major accrual items include wages and taxes. These accruals are a source of short-term finance. They are free source of financing since no interest is paid by the organisation on its accruals.

3. Bank Credit : Bank credit is a major source of meeting the working capital requirements. The forms of bank credit are as follows : (a) Overdraft This facility is allowed by banks wherein the organisation is allowed to withdraw in excess of the amount credited in its bank account. However, the bank specifies the maximum limit. Interest is charged on the actual amount withdrawn. (b) Cash Credit It is similar to overdraft facility. In case of cash credit facility, the company need not have a durrefit account. * (c) Loans : .

Loans are advances of fixed amounts which are credited to the current account of the borrower or given to him in cash. The borrower has to pay interest on the full loan amount. Loans are payable on demand or in instalments. (d) Discounting of Bills : Bills of exchange are instruments used to settle credit transactions. The banks may purchase the bills or discount the bills and gives advance to drawer or holder of the bill. On the due date of the bill, the bank collects money from the drawee. (e) Letter of Credit : It is an undertaking given by the buyer's bank guaranteeing the payment to the supplier or seller, on behalf of the buyer. The seller can draw bills against the letter of credit amount and get them discounted with his bank. For the buyer, letter of credit is an indirect source of financing. Letter of credit as a method of payment is mostly followed in foreign trade. A letter of credit is the best way to provide financial support to a business transaction, especially when the buyer and the seller are not known to each other and reside at different locations or even in different countries.

4. Funds from Operations : The firm can use the funds realised from sales to meet its working capital needs. In fact, it is the major part of working capital of a firm. 5. Issue of Debentures : Debentures can be issued by a company to meet its working capital needs. They provide permanent working capital to the company. Investors who want a fixed return and security in their investments invest in debentures. 6. Short Term Loans from Financial Institutions : Financial institutions like LIC, GIG, UTI, IDBI, ICICI, IFCI and others provide short term loans to manufacturing companies to meet their working capital needs. These loans have the following features : They are totally unsecured and are given against demand promissory notes.

The loan is given for a period of one year and can be renewed for two consecutive years. After repayment of a loan, the company can take a fresh loan only after 6 months period. 7. Self-Financing : Self-financing is an internal source of financing. Accumulated savings of the company are used for meeting short term needs of the business. It is an economical source of financing as there is no interest payment liability. 8. Inter-corporate Deposits : It is a deposit made by one company with another, normally for a period upto 6 months. They are usually of two types : (a) Call Deposits : In theory call deposits are withdrawable by the lender on giving a day's notice. But, in practice, at least 3 day's notice is to be given. The interest rate is around 14% p.a. (b) Three Months Deposits : These deposits which are more popular in practice are taken for a period of 90 days. The rate of interest is around 16% p.a.

TAXATION BENEFITS:
The various taxation benefits available to small scale industries are as follows : 1. Tax Holiday : New small scale industries are exempted from the payment of income tax under Section 80J of the Income Tax Act, 1961 on their profits upto 6% p.a. of their capital employed. This tax holiday is available upto 5 years from the commencement of production. A small scale industry has to satisfy the following two conditions to avail of this tax exemption facility. (i) The unit should hot have been formed by the splitting or reconstitution of an existing unit. (ii) The unit should employ ten or more workers in a manufacturing process with power or at least 20 workers without power. 2. Depreciation Allowance : Under Section 32 of the Income Tax Act, 1961, a small scale unit is entitled to a deduction on depreciation account on buildings, furniture, plant and machinery. The depreciation is allowed subject to a maximum of ? 20 lakhs. The amount of depreciation is calculated on diminishing balance method. To get the depreciation, assets must b owned by the industrial u'nit and actually used for the purpose of the business. 3. Expenditure on Scientific Research Allowance : Under Section 35 of the Income Tax Act, 1961, the following deduction in respect of expenditure on scientific research are allowed : (i) Any revenue expenditure incurred on scientific research related to business.

(ii) Any sum paid to a scientific research association or a university, college, institution or public company which has as its object, the undertaking of a scientific research. (iii) Any capital expenditure incurred on scientific research related to the business.

4. Investment Allowance : Investment allowance is allowed at the rate of 25% of the cost of acquisition of the new plant or machinery installed under Section 31 of the Income Tax Act. The investment allowance should be availed of in the year of installation in the year immediately following. 5. Rehabilitation Allowance : The business unit which have been discontinued on account of flood, cyclone, earthquake, typhoons, hurricanes or other natural calamities or accidental fire or explosion or riots or civil disturbances or. action by an enemy are granted rehabilitation allowance under section 33-B of the Income Tax Act, 1961. The Rehabilitation allowance is allowed equivalent to 60% of the amount of deduction allowable to the unit. The allowance is to be used for business purposes within 3 years of the unit's reestablishment or revival. 6. Amortisation of Preliminary Expenses : The preliminary expenses incurred in connection with the preparation of feasibility report, engineering expenses and legal charges for drafting agreements for the setting up of a new industrial unit or expansion of existing units are allowed to be written off under section 35 D of the Income Tax Act. The amount of expenditure allowed is 2.5% of the total cost of the project and 20% in case of units set up in backward areas. 7. Tax Concessions for Small Scale Industries in Rural Areas : The small scale units set up in rural areas are entitled to a deduction of 20% of the profits and gains from their total income. This concession is also allowed for small scale units started in 24% districts declared as backward areas by the Planning Commission. The deduction is allowed for a period of 10 years from year of commencement of manufacturing activity. 8. Expenditure on Acquisition of Patents and Copyrights : Under section 35-A of the Income Tax Act, any expenditure of a capital nature incurred in acquiring a patent and a copyright by a small scale industry is deductible from its income.

9. Exemption on Excise Duty : The exemption on excise duty limit is raised from ? 50 lakh to ? 1 crore to improve the competitiveness of small scale sector. 10. Profits from business of publication of books : A small scale industry engaged in the business of publication of books is entitled to claim a deduction of a sum equal to 20% of the profits and gains, derived from such business under section 80 of the Act, Books for the purpose of this section do not include newspapers, journals, magazines, diaries, brochures, pamphlets and other publication of similar nature. 11. Tax benefits for Amalgamation of sick units : Sickness in an industry, whether large or small, is quite widespread in the country and has become a national problem which has caused a great deal of concern. It is estimated that the aggregate amount involved in the sick units is more than ? 2,000 crores. The government policy has been to encourage the amalgamation of sick units and concessions have been announced to induce healthy units to take over sick concerns in the public interest. Tax concessions are available for amalgamation of sick units. 12. Income Tax Concession to Small Scale Industries established in Backward Areas: In order to promote rural industrialisation in the country, the Planning Commission of India in 1970-71, out of 435 districts, declared 299 districts as industrially backward. Special facilities and incentives in the form of concessional finance, central investment subsidy, relief in income tax etc. are being offered to the industrial units in those areas. According to section 80 HH of the Income Tax Act, the industrial units established in those 247 backward areas are allowed a deduction of 20% income tax on their income from their profits or gains. The conditions for eligibility are : (1) The unit must be set up on or after 31st December, 1970. (2) The unit should employ 10 or more workers with power and 20 or more without using power.

13. MODVAT Scheme : The long term fiscal policy had envisaged to provide the best solution for the problem of cascading effect of taxation of inputs on the value of final product in the Modified Value Added Tax (MODVAT) Scheme. This scheme provides for the extension of the present system of proforma credit to all excisable commodities with the exception of a few sectors like petroleum, tobacco and textile products. The objective of the scheme is to extend the scope of the provisions for set offs for excise and countervailing duties paid on inputs. This programme will be implemented in phased manner over a period of years, taking due account of the revenue implications, the need to revise administrative procedures and the lessons from experience gained in the early stages of the-reform. The purpose to use MODVAT is not to give substantial net reliefs on excise. The loss of duty on inputs will be recouped through higher excise taxation on final products. Indeed, shifting the effective burden of excise taxation away