Our Finance Minister shall be presenting the budget on February 1, 2023 and we expect the budget announcements to include reforms and measures to focus on reviving the economy and giving tax benefits to the small & medium income group. Considering the slowdown in the economy last year, MSMEs, which form a major part of the Indian value chain, are expecting a big relief and reforms in the upcoming budget.
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In this regard, PHDCCI would like to highlight a few important fiscal policy issues that need to be addressed in the forthcoming budget, which would go a long way in addressing major concerns of the MSME sector and help them to revive and scale up their operations significantly. These are listed below:
Import substitution through MSMEs for Make in India program
The Government is focusing on Import Substitution and Make in India. PHDCCI suggest that the Government should develop a framework to support enterprises whose products/ services can contribute to Import Substitution as more investment would be required in such areas. Soft loans at minimal interest rate of 5-6% with a long term tenure of 9-10 years for repayment period, easy land acquisition, less compliances could be key factors in developing import substitution in the country. SEZs focusing upon import substitution could be developed across the country and special benefits should be given to MSMEs for establishing units in such SEZs.
Strengthening of the provisions of delayed payments
Many MSMEs are ancillary units catering to the needs of large industries, both in the public and private sector. MSMEs as vendors to such large companies are facing the problem of delayed payments, affecting their cash flow, and working capital availability. Most of the time, delay in realisation of such receivables increases their operating cycle and reduces their ability to procure new orders or fulfil the existing ones. We would appreciate if government could work towards settlement of such delayed payments of MSMEs as early as possible. This will help the MSMEs in a big way to meet their working capital requirements.
Logistics cost for MSMEs
We suggest that the Government should develop a strategy to reduce the logistics cost for MSMEs. Logistics costs in developed economies is around 6-7%, whereas the same in India is about 13-14%. If logistics costs can come down, the benefits for manufacturers in general could be immense.
Easy testing & certifications for MSMEs
For any business to flourish, it is important that products meet certain standards and excel in quality. For exports, MSMEs need to meet a certain required international or region specific standards for which adequate facilities are not available in the country. In addition, the testing facilities that are available are costly. Testing & Certifications should be made convenient and cheaper for MSMEs. PHDCCI suggests that a mechanism/tie-up should be developed so that testing can be done at Indian Centers whereas certificates for the same test can be issued from various global testing Centers that are accepted in the respective countries/regions. Alternatively, Indian Testing Certificates should have global acceptance.
Treatment of Capital Gain Tax (CGT) on investment in Industry/Business
Section 54 of the Income Tax Act for granting exemption on investment of Capital Gain should be expanded to include all investments made in industry/businesses out of any kind of Capital Gain generated. In the budget 2019/20, investments made in startups out of Capital Gain were exempted under section 54GB, the validity of which was restricted up to March 2022. We recommend that investments made in all MSMEs out of Capital Gain on sale of residential or other properties should be exempted from income tax.
Rationalisation of Income Tax Rates
The reduction announced in corporate tax rates for domestic companies will significantly accelerate investments in manufacturing and open up new employment opportunities. Going ahead, we suggest that the Income Tax rates for proprietorship, Partnership firms and LLPs which comprise the majority of MSMEs should also be reduced to the level of 25% for existing enterprises and 15% for new enterprises in line with similar tax rates announced by the Government for Corporate entities.
MSME Facilitation Councils should also cover Medium Enterprises
In the provisions made in MSME Development Act 2006, for resolution of delayed payment of bills the Medium Enterprises have not been covered. Only Micro and Small Enterprises can refer their delayed payments to the MSE Facilitation Councils. It is therefore necessary that the Medium Industry should also be included under the Micro and Small Enterprises Facilitation Councils for settlement of delayed payments from the buyers with the provision of payments within maximum of 45 days if there is no specified payment date in the purchase order.
Expansion of TReDS services to cover larger number of MSMEs and PSUs and Corporates
The RBI had launched a scheme called TReDS (Trade Receivables Discounting System) to facilitate discounting of invoices and bills of exchange of MSME suppliers. The process of TReDS involves uploading of invoices and bills by MSMEs for discounting by converting them into factoring units, which have to be accepted by corporate buyers before their discounting can take place by financiers, who will then receive their payments from the bank of the corporate buyer. Very few MSME suppliers have been able to avail the facility of TReDS due to the lengthy process involved. It is therefore recommended that certain concessions to PSUs/ Large Companies who join TReDS be considered. For example – they can be allowed additional funding by Banks to the extent of 50% of MSMEs annual purchases and the process of registration and approval of companies who wish to join the TReDS Platform should be simplified to attract more companies to join this system of payment.
Reintroduction of Credit Linked Capital Subsidy for technology upgradation
In order to encourage MSMEs to adopt/ upgrade and install green and eco-friendly technologies, Government should provide fiscal incentives and support to MSMEs. In the earlier Credit Linked Capital Subsidy Scheme, 15 per cent upfront capital subsidy up to a maximum cap of Rs 15 lakh (i.e. on maximum investment in approved machinery up to Rs 1 crore) was being given to MSEs on institutional finance availed by them for induction of state-of-the-art or near state-of-the-art technology. This subsidy has been discontinued. It is suggested that Capital subsidy should be reintroduced to encourage MSMEs to adopt eco-friendly and green technologies and the limit of investment be increased to Rs 2 crore as the earlier limit of Rs 1 crore was fixed almost 15 years ago.
The writer is President at PHDCCI
