MSMEs – Cornerstone of Economic Recovery

2020 has been one of the most distressing years in recent times due to the global COVID-19 pandemic and its drastic effect on health, businesses, and societies. As we progressed through the outbreak in the first quarter of FY 2020-21, the Indian economy saw a slowdown, with real GDP falling by 23.9% and 7.5% in Q1 and Q2 compared to results for the same period in FY 2019-20. This was brought on by factors like lockdowns, restrictions on non-essential activities, and reduction in discretionary spending by citizens.

As restrictions eased out in the second and third quarters, we came to understand some inherent challenges, like vulnerabilities of informal sector workers (including migrant labourers) and global supply chain shortcomings. India also had other pressures like having to increase medical facilities and PPE production capacities and intermittent border aggressions.

MSME (Micro, Small and Medium Enterprises) sector is seen as the backbone of the Indian economy as it a huge job creator. It engages our vast working-age population in both rural and urban locations. Presently there are over six crore MSME entities involved in the manufacture of goods or provision of services in India. They contribute to nearly 30% of our exports. During the onset of the COVID-19 crisis as well, domestic manufacturers rose to the occasion by innovating on existing facilities to produce necessary supplies like sanitisers, masks, PPE kits, etc. Hence MSMEs are the natural choice for beneficiaries of Government revival schemes as their growth would have a trickle-down effect on the economy.

Recently, the definition of MSMEs was amended to change the criteria for classification as MSME to a combination of annual turnover and investment instead of ‘investment in plant and machinery/equipment’. An enterprise is now classified as a Micro, Small or Medium enterprise if it has an investment of less than INR 1 crore, 10 crores and 50 crores, respectively, and turnover less than INR 5 crore, 50 crores, and 250 crores, respectively.

Some necessary pre-budget economic relief measures were rolled out by the Central Government through stimulus packages with multiple tranches under the Atmanirbhar Bharat Yojana (self-reliant India campaign) in May, October, and November 2020. These measures focused on dual goals of strengthening the indigenous market and securing public welfare by providing liquidity to MSMEs and banking institutions, supporting migrant labourers, farmers, and poor sections of society through assured food security schemes, easing entry barriers for private players, boosting infrastructure, etc. Some of the specific benefits to MSMEs under the Atmanirbhar Bharat Abhiyaan included:

• Emergency Credit Line Guarantee Scheme (ECLGS): INR 3 lakh crore collateral-free automatic loans for MSMEs, as an emergency credit line for covid-relief (ECLGS), out of which over 71% has already been disbursed to qualifying businesses.
• MSME Fund of Funds: Investment in MSMEs by the central government through MSME fund of funds having a corpus of INR 10,000 crore, for entities demonstrating growth potential.
• Disallowance of Global Tenders: Global tenders have been disallowed in government procurement orders having value up to INR 200 crore. This will help domestic players in general.

Beyond this, there was also a movement dubbed ‘Vocal for Local’, which encouraged the production of domestic goods and services, relying on nationalistic sentiment to reduce dependence on imports. This led to a reduction in Chinese imports by 25% by August compared to the same period last year, which of course, led to a boost in sales of homegrown manufacturers, including MSMEs.

Further, the threshold limit for default for initiating corporate insolvency resolution procedures under the Insolvency and Bankruptcy Act, 2016, has been increased to INR 1 crore, as opposed to the previous limit of INR 1 lakh. This display of leniency towards MSMEs is a welcome relief in these uncertain times.

In March 2020, the IT Ministry had notified a Production-Linked Incentive (PLI) Scheme under which manufacturers of mobile phones, allied equipment manufacturing, pharmaceutical ingredients and medical devices would receive an incentive of up to 6% on incremental sales from the base year, FY 2019-20. Now, the same has been expanded to include other sectors like food processing, other electronics, telecom, speciality steel, automobiles and auto components, solar photovoltaic modules, textiles, and white goods such as air conditioners and LEDs. Certain threshold criteria have been prescribed, i.e., minimum incremental investment of INR 10 crore (MSME) or INR 100 crore (Others) and a maximum incremental investment of INR 1000 crore. Some sectors also have threshold criteria for incremental sales.

Union Budget 2021-22 Framework

The Union Budget for Financial Year 2021-22 was widely anticipated to follow on the same lines of self-reliance, help strengthen the fundamentals of the economy, and bring it back to a healthy growth rate while also keeping in mind the needs of the general population. The budget was presented by the Hon’ble Finance Minister Nirmala Sitharaman on 1 February 2021 in the Parliament.

The fiscal deficit target is around 6.8% of the GDP for FY22 and is estimated to rise to 9.5% for FY21, which is nearly thrice the previously set targets of 3.5%. The budget proposes this be brought down to 4.5% of the GDP by FY25-26.

This year’s focus was announced as the six pillars for reviving the economy:

1. Health and Wellbeing
2. Physical and Financial Capital and Infrastructure
3. Inclusive Development for Aspirational India
4. Reinvigorating Human Capital
5. Innovation and R&D
6. Minimum Government Maximum Governance

Several regulations around the securities market are proposed to be merged as a single code. Several direct taxes and indirect taxes amendments were also proposed.

One of the key features of this year’s budget has been the increase in capital expenditure compared to the previous year. The overall capital expenditure for FY22 is INR 5.54 lakh crore. This is expected to increase the economy’s productive capacity directly, thereby charting a course for sustained economic growth and long-term stability instead of the alternative relief measures of disbursing cash benefits or slashing tax rates, which do, of course, boost growth but may not be sustainable. Moreover, India has already seen historic cuts in tax rates since 2016, both for domestic companies and individual taxpayers.

Given that the pandemic took most nations by surprise regarding preparedness for a healthcare crisis, the government is focusing on developing the healthcare infrastructure of India through a centrally sponsored scheme called PM Aatmanirbhar Swasth Bharat Yojana, with an initial outlay of INR 64,180 crores over six years to develop existing and new healthcare systems for the detection and cure of new and emerging diseases.

The overall outlay for Health and Well-being is around INR 2.24 lakh crores (which has increased by 137% since the previous year) out of which a dedicated sum of INR 35,000 crores has been allocated for the COVID-19 vaccine for FY22. The increased allocation is expected to expand and strengthen existing national health institutions, National Centre for Disease Control (NCDC), Health Emergency Operation Centres and mobile hospitals.

Announcements benefiting the agricultural sector were linking 1000 more mandis to the e-national agriculture market (e-NAM) – a big push for e-platforms to help connect small producers and manufacturers to potential buyers. Others include developing five major fishing hubs, enhanced agro-credit lines, and increased contribution to a rural infrastructure development fund.

Some other significant announcements which are expected to increase robustness in the economy are:

• Privatisation of two public sector banks and one general insurance company and ongoing disinvestments of four public sector enterprises to be completed in FY22;
• Regulated gold exchanges to be set up country-wide;
• Setting up of seven textile parks over three years under the scheme of mega-investment textile parks;
• Increase in the FDI limits in the insurance sector from 49% to 74%.
• Government-owned development finance institution for infrastructure debt financing to be set up;
• Dedicated Asset Reconstruction Company and Asset Management Company to take over stressed assets of public sector banks to be set up;
• A single securities markets code to be introduced by consolidating four existing acts regulating the capital market, depositories, securities contracts, and government securities;
• Pipeline for monetisation of public assets such as roads, railways, airports, oil and gas infrastructure, power transmission infrastructure, warehouses, sports stadiums, etc. to be instituted;
• Launch of voluntary vehicle scrapping policy to retire unfit/outdated vehicles via a vehicle fitness test.

Ease of Doing Business

• Small Company Definition Widened: The scope of Small Company under The Companies Act, 2013 has been widened to include companies with paid-up share capital and turnover of INR 2 Crore and INR 20 Crore.
• One Person Companies (OPCs): NRIs will now be allowed to establish OPCs (one person company) of any size.
• NCLT Functioning: e-court systems are likely to be established for smoother NCLT functioning.
• SEBI Act Coverage: AIFs and Business Trusts likely to be brought within the ambit of the SEBI Act.

The Bill has introduced a string of proposals on business taxation and personal taxation and proposals relating to assessment and dispute resolution. Some changes to GST have also been proposed. Easing compliance norms and lessening tax burdens are expected to provide a much-needed boost to the economy.

Direct Tax Proposals

There are no changes in direct tax rates for individuals or corporate entities. However, in an unprecedented move, the tax audit limit under section 44AB has been increased from INR 5 crore to INR 10 crore (where at least 95% of payments are digitised), which would provide relief to many companies.

The following are the other significant proposals:

• Start-up Tax Holiday: Tax holiday for start-ups on reinvestment of long-term capital gains now extended to include investments in start-ups up to 31 March 2022.
• Goodwill Depreciation Disallowed: Goodwill of a business or profession will not be considered a depreciable asset, and no depreciation to be allowed even in respect to purchased goodwill.
• Advance Tax on Dividend Income: Relaxation on interest for default in advance tax payments extended to dividend income. No relaxation in respect of deemed dividend under section 2(22)(e). Advance tax will henceforth be applicable on dividend income only after its declaration.
• TDS on Purchase of Goods (Section 194Q): A new TDS of 0.1% (5% in the absence of PAN) has been introduced -- where a person’s (deductor’s) total sales, gross receipts or turnover from the business exceeds INR 10 crore during the year, and he is responsible for paying any sum to any resident for purchase of goods of value exceeding INR 50 lakh.
• Disinvestment and IFSC Relinquishments: Certain relief provisions have been introduced to facilitate the disinvestment of a public sector company. Further, there are some relaxations in provisions applicable to IFSCs.
• Aircraft Leasing: Tax holidays are proposed for aircraft leasing and rental companies.

Assessment and Litigation Reforms

• Board for Advance Rulings: The Authority for Advance Rulings (AAR) to be discontinued and the Central Government to constitute one or more Board for Advance Rulings, such that ruling of the Board for Advance Rulings will not be binding on the Department or the taxpayer and it would be appealable before the High Court.
• Faceless ITAT: Faceless, nameless ITAT scheme to be introduced on the same lines as the faceless appeal scheme in a jurisdiction-less manner. This will help in reducing costs and increasing efficiency and transparency.
• Discontinuance of Settlement Commission: Income Tax Settlement Commission will be discontinued, and an Interim Board will be constituted for pending cases. Vivaad se Vishwas (VsV) scheme not available for cases decided by the Income Tax Settlement Commission.
• Dispute Resolution Committee: Dispute Resolution Committee to be constituted for preventing new disputes and settling issues at the initial stage in the case. Those assessed with a taxable income of up to INR 50 lakh and any disputed income of INR 10 lakh can approach this committee.
• Reopening Time Limits: The time limit for reopening assessment proceedings has reduced from 4/6 years to 3 years, except when income concealed exceeds INR 50 lakhs, in which case the time limit is 10 years.
• Provisional Attachment: Assessing Officer to have the power to provisionally attach taxpayer’s property during the pendency of penalty proceedings for fake entries/invoices if penalty likely to exceed INR 2 crore.

Capital Gains

• The definition of slump sale has been expanded to include all types of ‘transfer’ (including exchange).
• Section 43CA amended such that the stamp duty value can be up to 120%, as opposed to earlier 110%, of the consideration in case of transfer of residential unit subject to other conditions.

Individual Taxation

• Exemption for Senior Citizens (Section 194P): Senior citizens having annual income consisting of only pension and interest will be exempt from filing income tax returns. New section 194P will be inserted to enforce the deduction of tax for such clients by banks.
• Tax on PF Interest: Interest accrued on an individual’s contribution to provident fund in an account now taxable (in excess of INR 250,000).
• LTC Cash Scheme: Expenditure incurred during a specified period, in lieu of Leave Travel Concession (LTC) exempt, subject to fulfilment of the prescribed conditions.
• Taxation of ULIPs: Maturity proceeds from the unit-linked insurance policy (ULIP) issued on or after 1 February 2021, proposed to be taxable as capital gains if the aggregate annual premium exceeds INR 250,000 in any financial years.

Goods and Service Tax (GST) Reforms

Certain updates were made in connection with the Goods and Service Tax by amendment of the CGST Act for several provisions as follows:

• Input Tax Credit Matching (Section 16): Section 16 amended to allow taxpayers’ claim of the input tax credit based on GSTR-2A and GSTR-2B.
• Retrospective Net Cash Interest (Section 50): Section 50 of the CGST Act is being amended to provide for a retrospective charge of interest on net cash liability with effect from 1 July 2017.
• GST Annual Return Self-Certification (Section 35 & 44): Section 35 and 44 amended: Mandatory requirement of furnishing the GST reconciliation report signed by the specified professional is relaxed by allowing the filing of annual return on a self-certification basis. The Commissioner can exempt a class of taxpayers from the requirement of filing the annual return.

Customs Reforms

Agriculture Infrastructure and Development Cess (AIDC) has been newly imposed on petrol and diesel at INR 2.5 and INR 4 per litre respectively. Further, a new initiative called ‘Turant Customs’ will be likely introduced for faceless, paperless, and contactless customs measures. An electronic portal for facilitating registration, filing of bills, payment of duties etc., has been visualised to streamline the customs process. Also, certain changes have been proposed in the Customs Tariff Act’s Schedule I with effect from 1 January 2022 to align with HSN 2022 to ensure alignment with the global valuation principles.

There has been a reduction in customs duty on a few items, such as:

• Reduced duty on copper scrap from 5% to 2.5%
• Basic and Special additional excise duty on petrol and high-speed diesel oil (both branded and unbranded) is reduced
• Increased duty on solar inverters from 5% to 20%
• Raised duty on solar lanterns from 5% to 15%
• The basic customs duty on gold and silver reduced.
• The Department will rationalise duty on textile, chemicals and other products
• Regarding agricultural products, the customs duty is increased on cotton, silks, alcohol, etc.
• Exemption of Social Welfare Surcharge on the value of AIDC imposed on gold and silver.
• The exemption on the import of leather will be withdrawn as they are domestically produced.

These are some of the salient updates brought in by the Finance Bill, 2021 and preceding relief measures. There is a marked change from established trends regarding capital expenditure and the national deficit. Tax reforms have been mostly procedural to increase efficiency and ensure effective collection. However, through economic and public policy measures in the budget, the Indian economy seems to be on the road to recovery in the post-COVID era. The latest economic survey released by the ministry of finance projects the GDP growth rate to rebound to 11% for the 2012-22 period while the budget estimated real GDP to be between 10 and 10.5%.

Endnote

MSMEs are the beating heart of our country, propelling job creation, urbanisation, higher education, and increasing quality of life to our population. Their revival is a key aspect of building a better India post-covid. This, when combined with our strides made in healthcare, vaccine research and production, and other prevention measures, is likely to help restore some semblance of normalcy in Indian society in FY 2022. The years 2020 and 2021 shall be remembered as a time of resilience by the Indian people – students, private sector employees, and businesses alike.