Calling micro, small, and medium enterprises (MSMEs) a “major engine of growth and employment generation in the country”, Union finance minister Arun Jaitley announced a slew of measures to boost the sector — from tax sops to credit support to flexible employment options.
With a focus on improving lending to the MSME sector, under peril due to the twin disruptions of demonetisation in 2016 and the introduction of the Goods and Services Tax in July 2017, the budget allocated Rs 3 lakh crore for loans under the PM Mudra Yojana, which funds such firms. The government has also proposed revamping the system of sanctioning of loans to SMEs by linking this with the GST Network.
The budget also allocated Rs 3,794 crore to MSME sector for giving credit support, capital and interest subsidy for innovations.
“Government will soon announce measures for effectively addressing non-performing assets and stressed accounts of MSMEs. This will enable larger financing of MSMEs and also considerably ease cash flow challenges faced by them,” Jaitley said in his budget speech.
The MSME sector has a 31% share in the Indian economy and employs over 117 million people, but despite the low number of MSME accounts that turn into bad debts, most lenders are chary of lending to such firms.
According to the Economic Survey 2018, MSMEs accounted for Rs 65,800 crore or 11.8% of the total bad debt of state-run banks.
The budget announced the reduction of corporate tax to 25% for all MSMEs with a turnover of less than Rs 250 crore.
Previously, this lower tax rate was applicable to only those with a turnover of less than Rs 50 core.
“It is a welcome step as this tax rationalisation will lead to better cash flow in the hands of MSMEs. This in turn can be used for expansion and more job creation,” said Sanjay Bhatia, managing director of Hindustan Tin Works Ltd, an MSME.
But a few experts pointed to the drawback in the tax sop.
“While it is a welcome move, it is also an example of not fully thinking through the implications of the proposal. For example, the MAT (Minimum Alternate Tax) rate for MSMEs is at a high rate of 20%. Hence, a larger, across the board reduction would have been a better approach,” said Abhishek Goenka, partner and leader, PwC India. He added that the turnover threshold could lead to innovative structuring of companies looking to benefit from the lower tax.
To make doing business easier for MSMEs the Budget proposed e-assessment of income tax and pre-notice for indirect tax. Both provisions would reduce human intervention in tax disputes.
But concerns of delayed payments continue for the sector along with high cost of borrowing which impacts margins.
“New reforms or strengthening of the existing MSME Development Act (are needed) to address the issue of delayed payments faced by MSMEs. As per recent reports, across MSMEs, a total of ~10,000 crore is pending,” said R Narayan, CEO Power2SME, a buying club for MSMEs.