Union Budget 2023: Wish list from MSMEs

The Micro, Small, and Medium Enterprises (MSME) sector in India is central to India’s economic ambitions. The sector has experienced exponential growth in recent years, with a significant number of units surpassing the threshold of ₹250 crore in turnover, evolving into mid-sized corporates. 

The principle of proportionality dictates that the laws and regulations governing micro and small manufacturing enterprises should be separate from those for larger enterprises. Micro and small manufacturers play a critical role in the supply chain, and targeting them specifically with different laws and budget allocations would help to achieve the government's goal of promoting manufacturing.

MSMEs need to be taxed at a lower rate than larger corporates as small businesses often operate on thin margins and are highly sensitive to changes in the business environment. A reduced tax rate of around 15% would help to ease the burden on these businesses and allow them to retain more of their profits, which can be reinvested in the business. Lowering the tax rate for MSMEs would also make them more competitive in the market, as it would reduce the cost of doing business and allow them to offer more competitive prices to customers. 

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Union Budget 2023: What MSMEs want from FM Nirmala Sitharaman

It is important to note that under the MSME Development Act 2006, provisions for resolving delayed payments only apply to micro and small enterprises and do not include medium enterprises. In order for medium enterprises to also have access to these provisions for resolving delayed payments, it is necessary that they be included under the Micro and Small Enterprises Facilitation Councils. This will ensure MSMEs can also refer their delayed payments to these councils and have a maximum of 45 days to receive a payment if there is no specified payment date in the purchase order.

In order to reduce the costs of doing business in India, it is crucial to implement reforms in the banking and finance sector, particularly in terms of credit ratings for Small and Medium Enterprises (SMEs). The current models used by credit rating agencies are not a great fit for SMEs, and, consequently, most of these small businesses fail to receive an investment-grade rating. Additionally, the issue of prepayment charges, despite banks signing a code not to charge such fees, still persists and banks are imposing two to four percent penalties. 

One key issue that MSME export units face is the upfront payment of goods and services tax (GST) on raw materials, which is only reimbursed once the finished goods are exported. This puts a considerable strain on the working capital of small businesses and calls for a substantial concession on GST to alleviate this burden.

It is also imperative to implement measures to decriminalise business practices and reduce the costs of doing business in India. This could include increasing the threshold for violations of the Goods and Services Tax (GST) Law from Rs 5 crore to Rs 20 crore. This will help to reduce the burden on small businesses and make it easier for them to comply with the law.

Another area that needs attention is the treatment of Capital Gain Tax (CGT) on investments in industry/business. Section 54 of the Income Tax Act currently grants exemption on investment of Capital Gain, but this should be expanded to include all investments made in industry and businesses out of capital gain, regardless of the source of the capital gain. This will incentivise further investment in the sector and catalyse growth.

To speed up the adoption of renewable energy and shorten the long waiting times that traditional financing methods warrant, a dedicated committee should be established to explore and implement innovative financing strategies. One important step in achieving this goal is to remove taxes on biofuels; this will increase productivity and also help secure a steady supply of energy. Additionally, to attract significant investment in green hydrogen, import duty on electrolyzers needs to be done away with. This will make it more affordable for businesses to adopt renewable energy, reducing their costs and helping to meet the country’s ESG goals.

Jyoti Prakash Gadia is the Managing Director of SEBI-registered merchant bank Resurgent India and has nearly two decades of experience in the financial services industry.