What Indian MSMEs want to see in the upcoming budget, a wish-list

With a little over two months to go before the next Lok Sabha elections, the budget to be presented by […]


With a little over two months to go before the next Lok Sabha elections, the budget to be presented by the finance minister on February 1 will be an interim one. Given the recent slew of initiatives and measures launched by the government to boost the MSME sector in India, all stakeholders (MSMEs, i.e.) are eagerly anticipating more initiatives and measures that will not only accelerate the sector’s growth further but also make it more friction-free.

We spoke with a few such stakeholders for a deep dive into the sector’s expectations and the general view was that even though much has been done, much more still remains to be done for the sector. Everyone was optimistic though given that the last two budgets had clearly shown that the government is focusing very sharply on the sector with generous allocations and initiatives. This is not at all surprising, given that MSMEs currently employ 40 per cent of the country’s workforce, contribute 37 per cent to India’s Gross Domestic Produce (GDP), and, has a share of 43 per cent in its total exports, according to data maintained by the commerce ministry.

Various MSME associations pan India have already submitted their lists of “recommendations” (read, “expectations”) to the commerce ministry. We spoke with a few MSME entrepreneurs as well as MSME associations pan India, including Ludhiana-based Chamber of Industrial and Commercial Undertakings (CICU), Bihar Chamber of Commerce and Industries (BCCI), and Indian Industries Association (IIA) and the general feeling we got from these interactions is that everyone is waiting for the February 1 budget speech with baited breath.

From our discussions with the various stakeholders and players in the MSME sector, we have gleaned out the wish-list below that cuts across all verticals and will benefit the sector in general:

Reduction of taxes

Taxes levied on MSMEs are one of the major pain points and most associations in the country want the government to rejig them. CICU General Secretary Pankaj Sharma told us that the help that the sector is getting from the government is not proportionate with the volume of the taxes it pays, and consequently, the shutdown ratio in the sector is currently very high.

The six tax-related “recommendations” that the chamber has made are:

  1. Increase in Basic exemption Limit from ₹50 lakh to ₹3.50 lakh and a new tax bracket at 10 per cent;
  2. An increase in the deduction limit under section 80C to ₹2 lakh from the current ₹1.5 lakh;
  3. An increase in the investment eligible for exemption from capital gains tax under section 54EC to ₹1 crore from the current ₹ 50 lakh, and a reduction in the lock-in period of the same to three years from the present five;
  4. Reduction in tax domestic partnerships firms to 25 per cent from the current 30 per cent for firms with turnovers lower than ₹50 crore;
  5. Reduction in tax rate on long term capital gain from sale of properties to 15 per cent from the current 20 per cent; and,
  6. Stay of demand up to ITAT level, which essentially means that the demand assessed from assessment proceedings by the Assessing Authority be stayed with a deposit of 20 per cent of the disputed demand up to Appellate Tribunal level, which is at currently applicable up to the First Appellate Authority.

Sharma opined that “the MSME sector is not in a good shape due to lack of consistent policies from government.” He also underscored the thought of most MSMEs that the services and incentivisation they received from the government was not proportionate with the volume of taxes they paid.

Lower education/ed-tech sector GST to 5 per cent 

In academic year 2017-2018, the number of colleges and universities in India was 39,050 and 903, respectively, according to Indian Brand Equity Foundation (IBEF). Running parallel to these educational establishments are private coaching centers and other online coaching platforms that are profitable businesses, and their number is also increasing rapidly. These numbers are not surprising because 36.64 million students opted to pursue higher education in India in 2017–2018 alone and the gross enrolment ratio in higher education institutes reached 25.8 per cent in the same academic year, and the government is aiming to up this to 30 per cent by 2019–2030.

EduGorilla CEO Rohit Manglik told us that this target is achievable only if ample opportunities are given to MSMEs to contribute in the sector. One way to encourage more MSMEs to enter the education/edu-tech sector, according to Manglik, is moving it to a lower goods and services tax (GST) bracket.

“Lowering the GST rates from the existing 18 per cent to (the expected) 5 per cent will make education more affordable. The upcoming budget also needs to allocate a bigger spending for education and have provision for proper teacher training, along with higher pay and administrative incentives,” he said. Manglik also underscored the need for incentives to encourage research in all disciplines and for augmenting the technical capacity of the National Council of Educational Research and Training (NCERT) and National Institute of Educational Planning and Administration (NUEPA), and the many more central educational institutions like them. Furthermore, he said, a comprehensive education scheme on lines of Ayushman Bharat can be a great start of the process to improve the quality of education in the country.

Special status for the state of Bihar

Bihar is a state that has an abundance of natural resources that can fuel the MSME sector but the full potential of the state has not been realized yet on account of various factors, including politics, according to BCCI.

The way forward, according to BCCI President PK Agrawal, is granting the state special status which would make it eligible for various incentives and concessions. He also said that proper allocation of funds should be done to promote industries in the state, especially those in sugar, power generation and distribution, agriculture-based products and services, food processing, steel and engineering, tourism, and professional and technical education and training. For industrial units, BCCI strongly recommends the restoration of Section 80 IB (5) of the Income Tax Act 1961 (which was withdrawn with effect from 01-04-2004) to provide tax exemption for 3–5 years to new industrial units set up in the state.

According to Agrawal, “The limit for spending in cash under section 40A(3) was reduced to ₹10,000 which has not gone down well with very small traders.” The chamber wants the old limit of ₹20,000 to be restored and has also recommended a revision of tax rates in order to encourage more MSMEs to file their tax returns honestly and on time.

Five per cent notional credit

IIA is very disappointed by the government’s failure to deliver efficiently on the tax incentives that were promised. IIA Lucknow Chapter President Surya Prakash Havelia told us that MSME growth in the region is stalled due to this, “before the last elections, the government had promised various tax incentives but those promises are still confined to paper. How will MSMEs flourish if they have to spend huge amounts to pay various charges and taxes?”

MSME expectations from the budget

Havelia is hoping for an increase in the basic exemption limit to ₹10 lakh from the current ₹5 lakh and a five per cent notional credit on GST, to revive the MSME sector.

More stable policies

The appliance and consumer electronics (ACE) industry has a huge potential of growth and also offers immense employment opportunities and that is both Indian and global brands have made huge investments in it. “However, an unsteady environment with multiple changes in tariffs, coupled with various free trade agreements and anti-protection laws have not allowed domestic players like us and other domestic manufacturers to flourish,” said Mitashi Edutainment Co-founder and Chairman Rakesh Dugar when we asked him what gaps he wanted the upcoming budget to bridge.

A rejig of the policies that are stunting growth in the ACE sector, Dugar said, would help Indian brands increase their penetration in the market along with driving their growth, which in turn will make domestic manufacturers self-reliant and globally competitive.

He further said, “We expect the government to favour expansionary economic policies that would give space to growth-boosting measures with the interim budget. Some of them have already been announced, but we are expecting more such as personal and commercial tax concessions, interest free loans to farmers, job reservations and other policies favouring local businesses.”

We think the measures Dugar has in his wish-list will weigh down on the government’s finances, but with the current low inflation rate, it can afford to be less conservative approach and push ahead with a few apparently high-cost measures to boost MSME growth without any adverse effects in the long run.

Reduction in TDS for the services sector

The services sector is one of the largest contributors to India’s economy today and its share in the MSME sector is 58 per cent. Observers say that this number could have been higher but for lack of capital, proper marketing channels, and excessive regulations.

One services company that has made a mark for itself in the services sector is Hyderabad-based SAT Infotech and the company’s CEO and Director Veera Swamy Arava says he would like to see a reduction in tax deduction at source (TDS) rates in this budget. He says that “SMEs in the Service Industry pay 10 per cent TDS and get a refund from the IT department after 8–9 months of year-end closure. The money is till then bottlenecked with the income tax department for almost 12 to 20 months. Which is why, I do not see any service company in India make a profit beyond 10 per cent. Finance mobilisation is also very tough for SMEs. This is why it would be great to see some reduction in TDS, down to at least 2 per cent this year, for the service industries.”

Such a reduction, we think, would result in financial savings which MSMEs in the services sector can use to digitalise their processes, something that is currently not happening at a satisfactory level, according to a recent Yes Bank survey in which over 60 per cent of MSME respondents were digital users to limited extents, but only 5 per cent had fully embraced the digital.

As an information technology entrepreneur, Arava is of opinion that SMEs should be part of more government projects based on their skillset and areas of expertise. “It is also important to enable SMEs with projects that will allow them to grow and thrive with their technical capabilities.”

Simplification of rules in the textile sector

One of the oldest MSME sectors in India, textile manufacture contributes two per cent to the GDP of India and employs more than 45 million people, as of fiscal 2017–2018. For long now, MSMEs in the textile hubs of Ludhiana, Surat, and Kolhapur have been demanding simple processes for availing bank loans, simplification of GST compliance, along with more investments, increased ease of availing bank loans, and more intensive skilling of manpower, according to Shingora Textiles CEO Amit Jain.

Especially with reference to investments, Jain said that even though 100 per cent FDI is allowed in textiles, rules need to be further simplified to enable MSME owners to expand and flourish.

Further promotion of e-commerce

Speaking on expectations from the budget, online MSME marketplace Sulekha.com’s CEO and Founder Satya Prabhakar applauded the recent increase in GST tax exemption limit. He told us that “The move will aid SMEs tremendously. Sulekha serves more than 67,000 paid SMEs pan India and this move of the Government will encourage thousands of them to file annual returns and pay a simple quarterly tax.”

Prabhakar expects the government to announce several such steps in the upcoming budget, including moving services such as marketing and advertising to a lower GST bracket. “The government can also consider increasing online accounting and online tax calculation procedures for thousands of MSMEs who will benefit from an easy compliance regime,” he said.

Given the brilliant success rate of digital payments that constitute more than 70 per cent of Sulekha’s business, Satya hopes that “the budget would provide further impetus for digital payments like UPI, credit card and debit card payments by incentivizing them vis-à-vis cash or cheque payments.” 

Deeper penetration of exponential technologies

The Indian MSME sector has already witnessed much boost from the government for the promotion and implementation of exponential technologies such as artificial intelligence (AI), machine learning (ML), and Internet of Things (IoT), and in this year’s budget, the sector is expecting sharper focus on driving domestic innovation coupled with fiscal incentive schemes and liberalization norms.

Dr Rishi Bhatnagar, Chairman of the IoT panel at the Institution of Engineering and Technology (IET) expects the government to establish a data ecosystem where all relevant stakeholders can participate to develop a structured plan on how to roll out data services based on IoT.

According to Bhatnagar, the two primary needs at present are:

  1. Establishing a landing page for global or local OEMs and enterprise customers, if they want to use either IoT services in India and are looking for contact partner who can support them, or contact partner, who can support them to adapt local services for the global market; and,
  2. Reduced duties on imported components such as chipsets and network modules that are required for IoT hardware assembly. This, he says, will help reduce the cost of IoT devices.

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