It is critical for the government to take some bold moves that helps in revival of the sector and boosts investor confidence.
Covid-19 impacted all major economies across the globe, including India. The sudden halt in economic activities during the nationwide lockdown left the MSMEs as one of the most affected sectors. Issues such as disrupted working capital cycle, lack of confidence to steer through loss in business or revenue, reverse migration of rural and semi-urban workforce, dried investments, difficulties in meeting compliances, left the sector exposed to the business continuity challenges.
While the business environment may not be conducive at the moment, the recent statement made by Finance Minister, Nirmala Sitharaman, when she sought suggestions from industry experts as part of the consultation process, has stirred hopes for the MSME sector. Her statement, “Send me your inputs so that we can see a Budget like never before’, indicates that the government has intentions to focus on the sector so that it overcomes the setback.
In the current environment, it is critical for the government to take some bold moves that helps in revival of the sector and boosts investor confidence. In terms of expectations from Budget 2021, some of these announcements should be watched out:
- Funding: Taking a multi-pronged approach, right from making cheaper finances available, to making foreign and institutional investment attractive, to policy support for revival and putting the sector back on growth trajectory seems like need of the hour.
- Working capital needs: The government can suspend Basel norms for the next 2-3 years, ease in loan application and approval process, case by case threshold-based loan approvals, extension of credit guarantee schemes and attach tax incentives with timely payments made by MSMEs.
- Enable policies to promote R&D: The government should focus on making India a global manufacturing and a research and development hub. Therefore, a cohesive 3-5 year plan for enabling collaboration between the MSME sector and global companies by the government should provide a good starting point. Similarly, for research and development activities a specific policy initiative should also be prepared that focusses on research, receiving prototypes, semi-developed samples and their testing and related support activities. Providing tax incentives for skilled employees in these activities and specifically classifying aforesaid activities as ‘export’ for tax purposes will outline clear government intent.
- Tech enablement: Technology adoption by MSME sector will be a key for making them globally competitive in the long run. Therefore, government needs to incentivise upskilling of technology resources, development of technology products and make technology and knowledge sharing a norm for the sector.
- Bridging the gap between urban & rural India: Given the reverse migration of employees to rural, tier 2 and tier 3 cities due to the COVID-19 uncertainty, it is the ideal time for the government to take steps to kickstart the rural economy by supporting MSMEs. With the local market knowledge, MSMEs are poised to become a bridge for transforming smaller cities and rural areas into production hubs. They need policy support to bring together working capital, skilled workforce and relevant technology infrastructure, through which rural sector, MSMEs and large companies can work together to serve global markets.
- Tax incentives: For the next 3-5 years, this sector needs to be seen with a different lens and following avenues may be explored by government from tax standpoint. Provide beneficial tax rate (of 15%) to bring parity across tax payers vis-a-vis manufacturing activity, additional tax incentive for hiring additional employees, reduced withholding tax rates (based on industry specific average tax profitability) or extension of lower withholding tax certificates on self-declaration basis, without annual approval from tax authorities, reduction in long term capital gains on unlisted shares, substantial reduction in compliance cost (by bringing digital means and making compliances quarterly, instead of monthly compliances), reduced GST tax rates on input goods and services, condition based reduction in import duties on parts and components and raw material for the MSME sector and raising import custom duties on finished goods to enable collaboration between large companies and MSME sector, time bound issuance of GST refunds, etc.
- Ease of doing business: Relaxation in stringent compliances required for foreign exchange inflows and outflows can enable global partnership. These may include, access to simpler and digitised compliances (on the lines of faceless audit, as introduced in the income-tax provisions), introduction of annual returns (rather than monthly compliances) for labour related compliances including PF, ESI etc and decriminalising minor non-compliances.
The expectations continue from the government to consider these demands, run high across the MSME space. Whether the upcoming budget will unlock the substantial value or will it be dealt with caution amongst investors and companies remains to be seen.
(The writer is Tax Partner, with EY)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)