India currently is the fifth-largest economy and is on track to surpass China soon to become the third- largest. An economy with a GDP of $5 trillion is imminent. India wants to become a developed country by 2047. All these point to a need for a robust and growing MSME sector. There are almost 64 million MSMEs in India. Over 94% of them are micro businesses, 4.5% are small and only 1% are medium-sized. Without exception, large corporations and businesses rely on MSMEs to supply them with components, ancillary equipment, goods and services. Therefore, both big and small businesses exist to complement one another. All sectors across industries, from the manufacturing of automobiles, pharmaceuticals, chemicals, and engineering to the services of travel and tourism, observe this symbiotic link between the MSMEs and the large sector. India SME Forum has compiled a list of very focused budget recommendations for the Union Budget of 2023, compiled from among the recommendations of around 1lakh MSMEs across the various sectors.
A singular rate of GST: One Nation One Tax & Ease of doing business
Goods & Service Tax was implemented as one of the biggest & significant indirect tax reforms in India. From 1st July 2017, a uniform tax on goods marked by our Prime Minister Shri Narendra Modi as One Nation – One Tax – One Market in India.
- The original concept of GST as a Single – Point levy was expected to raise GDP growth by as much as one to two percent. The tax is a little different from the original concept of a single levy & has many layers in its actual implementation. Unless these layers are pruned away and the tax is made simpler & more rational, it cannot become a stimulant to our economic growth, as it was originally meant to be under the Narendra Modi’s vision.
- Any dynamic GST system which is the highest in Asian countries can’t possibly operate with multiple rate slabs of tax as 5%, 12%, 18% & 28%.
- A singular rate of GST refers to having only one single uniform tax applied on goods or services, instead of several different ones depending on various factors like location or type/category etc., thereby eliminating regional disparities between states while ensuring fair market practices too.
As per the MoMSME data, registered MSMEs till date, on Udyam portal, are 1,31,12,968, out of which 96.37% are micro enterprises.
- According to a statistical report published on completion of 5 years of GST by the Goods and Services Tax Network, for FY 2021-22, total number of companies registered under GST as on 30th June, 2022 are 1.38 crores, out of which 15 lakhs are composition tax payers, whose turnover is up to Rs. 75 lakhs ( Rs. 50 lakhs in case of few States).
- We wish to highlight a few observations from the report for the financial year 2021-22, basis which few recommendations for the upcoming budget depend upon. 89,96,659 total taxpayers are those filing non-NIL returns.
- 99,501 are medium and large enterprises, (T/o above 50 crores), that are filing GSTR-3B, which constitutes 1.1%, of the total GST registrations but contributes to 69.8% of the total GST cash collection.
- 7,73,355 are small enterprises that are filing GSTR-3B, which constitutes 8.6% of the GST registrations but revenue but contribute to 16.67% of GST cash collection.
- Whereas 8123803 enterprises are micro enterprises with a t/o of less than 5 crores, constituting 90% of the registered tax payers but contribute only 13.53% of the GST cash revenue collection.
- This observation can also be correlated from the statistical report that 80.20% of the 1.45 crore registered GST tax payers are proprietorships whereas 10.53% are partnership firms. The total GST revenue collection from proprietorship firms is 13.28% and partnership firms is 7.29% of the total collection which is a sum percentage total of 20.57%
- Based on these observations it is recommended to ease out the rate of GST for micro and small units and help them grow first and scale by offering them a single lower slab for GST thereby enabling their growth and making them competitive.
- Single point tax will eliminate cost & cumbersome compliance and actually help create One Nation one Tax and Ease of Doing Business in true spirit and action.
Increase in Exports – Vocal for Local & Local to Global
Creation of a fund mechanism to reinvigorate Exports by MSMEs:
Less than 1% of the 6.3 crore Indian MSMEs are exporting while most of the focus on exports is on Large enterprises that do not need help in promoting or positioning their products / services in International markets. A fund estimate of Rs. 3000-4000 crore needs to be created for identifying, supporting and giving a boost to local Indian MSEs having the potential to become exporters, for competing in global markets and making them a part of Global value Chains.
- This fund can be primarily utilized for supporting Micro & Small Enterprises in the form of reimbursement of fees paid towards registration of international patents, trademarks and geographical indications that can help the MSEs to establish as well as increase their market share in foreign countries. This will highly benefit and encourage local MSME manufacturers to create international brands and take their products to the international market.
- An enterprise having International Standards / Quality Certification for its goods and/or services can easily increase exports but an MSE with insufficient financial resources is restrained at times when lab testing fees are as high as 10 lacs and unaffordable. This fund can be employed for this purpose wherein the MSEs can fully reimburse international testing and certification expenses too, thereby enabling more becoming quality conscious and more Indian products to go global.
- Furthermore, the fund can also be utilized to build a trade promotion organization that specializes only in Micro and Small Enterprise exports promotion, having its offices in major cities in different countries to create a foundation for Indian MSE products and build a continuous stream for Indian exports. This organization can work towards strengthening the presence of Indian MSEs through international B2B & B2C exhibitions and other trade events.
- PLI scheme needs to be extended to MSEs to identify and incentivize the local MSME manufacturers that have the potential to manufacture substitutes to products imported globally and contribute fully to the Hon’ble Prime Minister’s vision of Atmanirbhar India.
NPA Norms for MSMEs – Distressed Asset Subordinate Debt Scheme :
The Rs 20,000-crore Credit Guarantee Scheme for Subordinate Debt (CGSSD) launched in June 2020 to support stressed MSMEs or non-performing asset (NPA) accounts is yet to attract a sizeable number of potential beneficiaries. In fact, the beneficiary count has dropped 37 per cent from a mere 473 in the financial year 2020-21 to 298 in FY22. The total beneficiary count under CGSSD stood at 771 as of March 2022. According to the MSME Ministry’s FY22 annual report, the scheme had extended guarantees amounting to Rs 81.78 crore to 756 borrowers as of December 31, 2021, indicating only 15 new beneficiaries were added till March this year. The present classification of SMA 1 & SMA 2 actually starts from the 31st day of failing the interest payment whereas on the other side the MSEs are struggling with delayed payments. In the current scenario, an MSME is already announced as an NPA even before it actually becomes one in true sense as it stops receiving any help from the bank the moment it goes into SMA-1 classification, nor does it get any help on working capital or any support on maintaining cash flows.
The entire payment cycle of an MSME ranges from atleast 100 -120 days and most MSEs make supplies to one or two large corporate houses or CPSEs. Most payments from Large Corporates, CPSEs, PSUs, Central or State Govt payments too are almost never affected earlier than 90 days. In this case classifying a MSE account as NPA when MSEs are unable to realise due payments and have no other cash flows when compared to Medium or Large Enterprises, is completely biased and a very tough stance against Micro and Small Industry sectors.
Moreover once declared NPA, the interest rates get coupled with penal and other high compounded interest amounts, ultimately leading to the MSME in a vicious cycle with absolutely no funds available and hence we are unable to find takers for the subordinate debt fund scheme.
Recommendations For the enterprises that are to be classified as NPAs:
- It is strongly recommended that rather than classifying the enterprise as an NPA and categorising them under the SMA classification, the enterprise should be given in total of 180 days where the enterprise must be allowed to service at least the interest from 31st day in case it fails to pay principal + interest, and continues / resumes to pay the interest + principal amount on or before the 180th day, and failing to do either, this enterprise could be restructured based on the situation or classified as an NPA. If the enterprise is paying interest, but there are signs of incipient stress, then restructuring should be the norm.
- Instead of monthly paybacks, the enterprise can be given a choice to repay the loan on a quarterly basis.
- The extension of current NPA norms for MSMEs to 180 days can help provide relief to the stressed enterprises, while also making it easier for them to repay their loans and not shut down their businesses.
- If possible, the government should grant an amnesty by rephrasing the Distressed Assets Funds, Fund of Funds scheme, and other programmes to claw back the penal interests and other penalties that are levied on the enterprise’s loan accounts and offer a One Time Settlement Funding (OTS) programme where the enterprise can pay the principal amount in 10 to 12 monthly installments and the simple interest amount can be paid either by the Government or by the Enterprise, once their loan account is classified as standard. This is extremely important to help in the resumption of production in units under stress and helping us bring back manufacturing jobs.
Tax Rate Cut
The Finance Ministry had earlier, in its statement of April 8, 2022, stated: “The gross corporate taxes during 2021-22 was ₹8.6 lakh crore against ₹6.5 lakh crore last year, which shows that the new simplified tax regime with low rates and no exemptions has lived up to its promise.” The same statement said the total revenue collection had jumped by almost ₹5 lakh crore in FY22 (from a budget estimate of ₹22.17 lakh crore to ₹27.07 crore) – a 34% year-on-year growth, led by growth of 49% in direct taxes and 20% in indirect taxes. It attributed such growth to “rapid economic recovery after successive waves of COVID”. Using FY20 as the base, it was also stated that the corporate tax collections increased by 66%, the average tax buoyancy by 2% (highest since FY07) and the GDP by 33%.
- A July 2021 SBI research paper explains it for FY21, that it studied the impact of several favourable policy measures. It stated that (i) corporate tax cut “contributed 19% to the top line” (ii) “extended period of low-interest rate” contributed “on an average 5% to the overall top line” (iii) expenditure reduction (through various ways) contributed “as much as 31%” on top line and (iv) “employee costs have been cut” on an average by 3% in FY21. It is, therefore, clear that the 2019 corporate tax cut contributed to the soaring corporate profits.
- On March 25, 2022, the Hon’ble FM stated in the Lok Sabha that despite the COVID impact and subsequent tax decrease, the government has already received corporate tax of Rs. 7.3 lakh crore and the corporation tax collected so far this fiscal year is 15% above than the government’s revised projection of Rs 6.35 lakh crore for FY22. In fact, it exceeds the FY23 target of Rs. 7.2 lakh crore as well.
- However, only 15.85% of businesses opted for the 22% tax without exemptions or incentives, and just 0.14% of businesses opted for the 15% tax intended for new industrial units in FY20, according to the budget document for 2022–2023.
According to CRISIL MI&A Research’s SME Report 2022, 43% of India’s MSMEs universe by value are likely to remain below the pre pandemic (fiscal 2020) level in terms of earnings before interest, tax, depreciation, and amortisation (EBITDA) margin this fiscal due to the inability to fully pass on high commodity costs and an unfavourable currency rate. However, it is anticipated that almost all MSMEs will surpass their pre-pandemic revenue levels. The data shows that MSME EBITDA margins severely dropped in FY21, mostly as a result of COVID-19’s effects on the economy.
- If tax is reduced for the MSMEs, then MSMEs can perform better. After Covid 19, MSMEs are affected financially. Also the taxation done on large enterprises can’t be applicable on MSMEs.
- Also one of the most significant demands businesses have from the government for the next Budget is to further ease the financial burden for start-ups. Deduction in Taxation will be beneficial for the MSMEs with low turn-over.
- Therefore, it is suggested that micro businesses which opted to the 22% tax rate with no allowances or incentives be accorded the same 15% corporate tax rate entitlement as contemporary start-ups. Since, this experiment for corporate tax rate cut had a positive & insignificant effect for both the businesses and the government, we recommend that instead of just one year extension, extend this policy for three more years. This will help the micro units in the country and allow them to grow and upgrade into small or medium sized enterprises.
The fundamental meaning of Atma Nirbhar Bharat is industry assisting industry to thrive in a mutually beneficial and sustainable manner. Both large corporations and MSMEs need to step up their game. Everyone benefits from this approach. Government assistance must be restricted to fostering a supportive ecosystem and a structure for long-term development.
About India SME Forum
INDIA SME FORUM is India’s largest organisation for MSMEs with 19 State chapters, around 98000 paid members, 9 lakh subscribers and reaching 1.3 Crore MSMEs from all over India. India SME Forum is a gazetted member of the Advisory Committee since 2015 at the Ministry of MSME, and has a consultative role for recommending short-term and long-term tweaks in policies from the State and Federal Governments. (http://dcmsme.gov.in/advisory- Committee%202.8.2019.pdf ) ISF is also a member at the Standing Advisory Committee, FIDD of RBI, and various other committees of the Government, State and Central, apart from professional association & affiliation includes, UNIDO, UNCTAD, ITC Geneva, WUSME, INSME & WTO’s informal group for SMEs.