Budget 2018: A big booster to SMEs

  • Indian Economy
  • Mar 01,18
According to the National Sample Survey’s (NSS) 73rd round, there were around 634 trillion unincorporated non-agriculture MSMEs (micro, small and medium enterprises) in India in 2015-16 providing employment to 111 million workers. Taking into account the significance of MSMEs sector to the country’s economic development, Finance Minister Arun Jaitley announced a list of measures to help MSMEs and job creation in the budget 2018-19.
Budget 2018: A big booster to SMEs

While companies hailed the budget for measures such as lower tax rates for companies below Rs 250 crore turnover, credit support, etc for SMEs, the industry felt that it could have done much more. Rakesh Rao finds out…
 
According to the National Sample Survey’s (NSS) 73rd round, there were around 634 trillion unincorporated non-agriculture MSMEs (micro, small and medium enterprises) in India in 2015-16 providing employment to 111 million workers. Taking into account the significance of MSMEs sector to the country’s economic development, Finance Minister Arun Jaitley announced a list of measures to help MSMEs and job creation in the budget 2018-19.
 
Lowering of the corporate tax rate
 
In a big boost to SMEs, the Finance Minister announced a reduction in corporate tax rate from existing 30% to 25%, for companies who have reported turnover up to Rs 250 crore in the financial year 2016-17. The decision will benefit the entire class of MSMEs (which account for almost 99% of companies that file tax returns), leaving only about 7,000 companies (with turnover of over Rs 250 crores) in the higher tax slab of 30%. The lowering corporate tax rate for SMEs will leave them with higher investible surplus which in turn will create more jobs.
 
Out of 4,721 Indian listed companies that reported their numbers for 2016-17, 963 companies (20.3 percent of the total) could be major gainers. The median tax rate for these companies is approximately 34% for FY17. Consequently, the difference in tax rate (to the tune of 9%) is expected to improve their profit after tax margins, thus leading to better earnings visibility.
 
“The budget gave a fillip to the MSME sector by announcing several important measures such as credit support, capital and interest subsidy. The second targeted area was to give a boost to investments and rural India. Reduction in corporate tax rate for the MSME segment is positive for smaller auto ancillaries,” opined Manpreet Singh Sachdev, CEO, Elite Group.
 
Higher credit support for MSMEs 
 
Calling MSMEs the major engine of growth and employment generation, Finance Minister Arun Jaitley allocated Rs 3,794 crore to MSME sector for credit support, capital and interest subsidy on innovation.
 
Mass formalisation of the business of MSMEs has happened after demonetisation and introduction of GST. This has generated enormous amount of financial information database of MSMEs which will be used for improving the finances of MSMEs and other requirements including working capital, he added.
 
Online-system for credit availability
 
In addition to allocating Rs 3,794 crore to MSMEs sector for credit support, the budget also hinted at simplifying procedures for credit availability through online-system for SMEs. In his budget speech, FM proposed to bring banks on TREDS (Trade Electronic Receivable Discounting System) platform and link it with GSTN (Goods and Service Tax Network) so that the online loan sanctioning can enable prompt decision making by the banks. 
 
Special measures to solve NPAs for MSMEs
 
According to the Economic Survey 2017-18, MSMEs had 11.8% (Rs 65,800 crores) share in total NPAs (non-performing assets) by PSBs in the priority sector in the year ending March 2017, and 13.1% (Rs 75,700 crores) in the year ending March 2016. Despite lower level of NPA, extension of credit has been low for the SME sector in the country.
 
The Economic Survey 2017-18 data shows that out of a total outstanding credit of Rs 2,604,100 crores as in November 2017, only 17.4% was lent to MSMEs (while large enterprises got the rest). Against this background, Arun Jaitley, in his Budget speech, promised that the government will soon announce measures to effectively address NPAs and stressed accounts for MSMEs. This will enable a larger financing of MSMEs and considerably ease cash flow challenges faced by MSMEs.
 
“The Finance Minister's promise to address the problems of NPA & stressed accounts in MSME Sector is much appreciated,” commented Nikunj Turakhia, President of Steel Users Federation of India (SUFI).
 
MUDRA Scheme & Ease of doing business
 
In April 2015, the government launched Micro Units Development and Refinance Agency (MUDRA) Yojana to provide funding to the non-corporate, non-farm sector income generating activities of MSMEs whose credit needs are below Rs 10 lakh. The scheme has led to sanction of Rs 4.6 lakh crore in credit; out of which 76% accounts belong to women and more than 50% to SC, ST and OBCs. 
 
For further relief, the target for lending under the MUDRA Yojana for 2018-19 has been set at Rs 3 lakh crore. The FM also promised to review refinancing policy and eligibility criteria set up by under Mudra to enable better financing for MSMEs. “The sops to MSME 
through corporate tax reduction and Mudra loans are a welcome move for the industry,” said Sunil Misra, Director General, Indian Electrical & Electronics Manufacturers' Association (IEEMA).
 
The Finance Minister also stated that the government will contribute 12% of the wages of the new employees in the Employee Provident Fund (EPF) for select sectors over the next three years. Own contribution by women employees reduced to 8 % for first 3 years to incentivise employment of women.
 
The budget has proposed setting up of ‘model aspirational skill centres’ in every district under Pradhan Mantri Kaushal Kendra Programme.
 
Aiding Start-up India Program
 
The government is all set to strengthen the investment and VC sector in the country to help start-ups grow. Presenting the budget, the Finance Minister said the government will be building a very robust alternative investment regime in 
the country and rolling out a taxation regime designed for the special nature of the VCFs and the angel investors.
 
But the start-up community expected more from the budget. Saurabh Marda, Co-Founder & Managing Director, Freyr Energy, elaborated, “On the start-up industry front, while the Finance Minister did mention in passing that the government is in the process of creating a robust tax regime for alternate investment funds and angel investors, the exact measures were not discussed. The budget fails to address the longstanding appeals from start-ups such as extension of tax holidays and providing additional working capital. Reduction in corporate tax rate to 25% for companies with turnover up to Rs 250 crore in the financial year 2016-17 offers the only silver lining providing some relief to start-ups falling in this bracket.”
 
Protecting domestic industry
 
The budget has proposed changes in customs duty to promote creation of more jobs in the country and to incentivise domestic value addition and Make in India in sectors such as food processing, electronics, auto components, footwear and furniture. There is an increase in custom duty for mobile phones and televisions to support ‘Make in India’ program. A surcharge of 10% has been levied on imported goods as social welfare.
 
Increase in customs duties in sectors such as imitation jewellery (from 15% to 20%), toys (10% to 20%), etc will also help SMEs, since they dominant these sectors. In addition, rise in customs duty on LCD/LED/OLED panels, parts of TVs, smart watches, wearable devices, etc is expected to increase domestic sourcing of these products.
 
In addition, following sector specific measures will help SMEs: 
 
Auto components: Over 80% of the companies engaged in the auto component manufacturing are SMEs. Customs duty on select items such as engine & transmission parts, brakes and parts thereof, suspension and parts thereof, gear boxes and parts thereof, airbags etc have been enhanced from 7.5/10% to 15%. These items account for more than 50% of $ 43.5 billion domestic component industry's turnover and over 30% of its $ 11 billion exports. Hike in customs duty will not only encourage investments but also encourage technology development in these areas.
 
Forging industry: Development of the defence corridor between Chennai and Bengaluru will result in new opportunities for the Indian forging industry 
 
Footwear and leather industry: Deduction of 30% on emoluments paid to new employees Under Section 80-JJAA to be relaxed to 150 days for footwear and leather industry, to create more employment.
 
Some misses
 
Overall budget the budget focused on rural with many schemes announced to support farmers and rural healthcare. However, for urban population it was a status quo. “Increasing the eligibility for 25% corporate tax from Rs 50 crore to Rs 250 crore is a good move for MSME industries in that bracket. There are no special steps to grow the exports. How 15% growth in exports will be achieved is not clear. Creating employment should have been one of the thrust factors. But except big outlay in infrastructure projects (which will lead to large employment creation), no other measures are taken to make up the employment deficit from other sectors,” commented Vikas Khanvelkar, Managing Director, DesignTech Systems Ltd.
 
Agreeing with him, Shreekant Somany, CMD, Somany Ceramics Ltd (SCL) & Chairman, CII National SME Council, said, “Corporate India would have wanted reduction in taxes, which was promised, but hasn’t happened over the years. Beyond that, one of the good things that has happened is the direct labour employment, which has been extended to all sectors and will help in cutting down the middlemen. Whatever has been announced for MSMEs is a welcome step. But there’s a lot that needs to be done because it is one industry segment that has the highest potential for job creation and value addition to the country.” 
 
According to Manpreet Singh, several crucial announcements, such as increase in the tax slab of the personal income tax, were missing from the budget. There was no major announcement to boost electric vehicle fleet, he added. While industry hailed the proposal to lower tax rates for companies with a turnover below Rs 250 crore, the step may fall short of completely alleviating the problems of the SME sector. Some experts feel that the MSME sops will benefit only a few as majority of MSMEs are proprietorships and partnerships whereas the budgetary move applies only to companies.
 
Industry players were also curious to see how the Goods and Services Tax (GST) amendments would pan out as this was the first budget after the roll out of a seminal yet maiden tax regime. “Budget 2018 also saw replacement of cesses for specific purposes with new ones having substantially broader objectives. While the Union Budget 2018 has not delivered much relief in terms of providing for too many GST related amendments and we will have to pin our hopes on the GST Council meetings for that. While the Government could have done more and there is no end to wishful thinking. Overall, our Finance Minister has done a commendable job in living up to the aspirations of the Indian manufacturers,”  said Manpreet Singh summing up the general sentiment about the budget.

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