Cost Inflation and SME

Introduction

We’ve all heard the term “inflation,” but have you ever considered how it affects our daily lives? Inflation is defined as an increase in the prices of goods and services. Prices continue to rise to lead to an increase in the cost of living due to inflation, which is caused by a decline in the value of money, resulting in a loss of purchasing power. For example, if you buy a loaf of bread today for Rs. 50, it will cost you more than two years later to buy the same quantity. 

What is the Cost Inflation Index?

The Cost Inflation Index or (CII) is a measure of inflation that is used to calculate long-term capital gains from the sale of capital assets. Because the Cost Inflation Index is used in calculating Capital Gains, it is also known as the Capital Gain Index. Capital gains are the profits made from the sale of an asset, like real estate, ornaments, stock, and so on. 

CII helps us reduce tax while calculating the profit from selling any long-term asset, the inflation-adjusted cost of the asset is taken into account. Indexation refers to the entire process of adjusting the cost price of a capital asset to account for the effect of inflation using the cost index model.

Who measures the Cost Inflation Index?

The Central Board of Direct Taxes (CBDT) publishes the Cost Inflation Index in the official gazette every year. As per Notification No. So 3266(E) [No. 63/2019 (F. No. 370142/11/2019-TPL)], Dated 12-9-2019, the table below shows the year-wise Cost Index since 2001-02, with 2001-02 representing as the base year:

Does the Cost Inflation Index affect SMEs?

Small and medium-sized enterprises (SMEs) play an important role in nation-building. Over the last three decades, there has been a growing interest in the role of SMEs in job creation and economic growth, particularly in developing countries like India. Economists feel that the private sector, particularly SMEs, is an important component in emerging countries’ economic progress. According to studies, these industries influence economic growth through entrepreneurship, innovation, and the creation of new job opportunities. 

As large corporations and industries embrace modern technologies and lay off employees, SMEs play a critical role in providing employment. Many people in India earn their living by working in the mom-and-pop stores or Kirana Shops. However, because inflation affects everyone, small and medium-sized businesses are not immune.

Conclusion

Large corporations may be able to withstand the effects of inflation due to their large resources, but it is difficult for SMEs to avoid the effects of cost inflation. To stay competitive, small and medium-sized enterprises must raise their selling prices because cost raises the cost of production inherently. For example, the real estate market in India is booming because every family wants to own a home of their own. However, inflation in real estate causes an increase in home prices as new construction materials become more expensive, and as a result of the ever-increasing demand, flats are sold at high prices, Kirana shops, which are found almost everywhere in India, are also affected because they had to pay more when purchasing from their dealer and must sell at a higher price to make a minimum profit after incurring general overhead expenses, causing the final burden of inflation to fall on the consumers.