Why budget sops will bring MSME sector some relief but not for long
Forty-year-old Nikhil Kaushik, who runs Fortcaps Health Care at the Govindpura Industrial Estate in Bhopal, is a worried man. His small drug company, with an annual turnover of Rs 35 crore, makes capsules for big pharma, and the twin disruptions of demonetisation and GST have all but derailed his business. Profits had already slipped 30 per cent after demonetisation, and the imposition of a 28 per cent GST on capsules-compared to the 12.5 per cent excise duty earlier-was a double whammy, badly affecting sales in June and July last year. The story was the same for a large part of the MSME (micro, small and medium enterprises) sector in the country. For Kaushik, a rejig of GST rates later brought the applicable tax rate down to 18 per cent, but any relief on that account will be neutralised by the e-way bill for movement of goods.
Financing woes
The MSME sector, consisting of around 60 million firms, contributes 30 per cent to India's GDP. The sector also contributes 45 per cent or Rs 28 lakh crore to India's total manufacturing output, and 40 per cent to the country's exports. Yet, MSMEs have grown at just about 4.5 per cent in the past five years, and are plagued by issues related to financing and inadequate infrastructure. Most of the sector's woes are on the financial front-the lack of adequate capital due to complex collaterals needed to get term loans, a high corporate tax rate (which has been addressed to some extent in the budget), high transaction costs in imports and exports, difficulties in obtaining private equity funding, delay in fund disbursement, poor infrastructure facilities, unavailability of modern and affordable technology and access to markets. "In addition, the sector is grappling with the lack of a skilled and efficient workforce, and complex and rigid labour laws in a highly segmented labour market," says Anil Khaitan, president of the PHD Chamber of Commerce and Industry, an apex body for the MSMEs.
According to the ministry for MSMEs, there were 58.4 million such units in the country in 2017, mostly owned by individual proprietors, employing around 120 million people. Most of these units are outside the formal banking system, and hence are forced to borrow from informal sources or use their own limited funds. On top of this, the high incidence of taxes can be crippling.
Bengaluru-based Dashmesh Engineering is a 39-year-old company which makes machine tool accessories. Manjit Singh, the operations head, feels the 18 per cent tax on its products is "extremely high". "For businesses like ours, the tax should ideally be around 5 per cent," he says. Their vendors are unsure about how the GST operates. He found involving them in the tax network a big challenge. "For instance, inward purchases are not uploaded by my seller on time, resulting in protracted delays in our claims. This is affecting our reputation for no fault of ours," he adds. In addition, GST is applicable on labour jobs as well, unlike before, adding to the firm's burden. And then there are the technical glitches in filing GST. "Traders should not be penalised unnecessarily for technical failures of the GST portal. Also, the tax structure has to be rationalised. It's a proven fact that the lower the taxes, the higher is the compliance," Singh adds.
"Right now, besides the general shrinking of demand, MSME units are plagued by a shortage of capital, as funds are getting locked in the GST regime," says S.K. Pali, president of Bhopal's Govindpura Industrial Association. The government should, as an interim measure, instruct banks to enhance the working capital limit by at least 20 per cent, he says, adding that this would help MSMEs tide over the capital shortage in the short term.
The MSME sector is also a big contributor to the rising levels of non-performing assets (NPAs) of banks. Reports say that bad loans from the Mudra scheme have been on the rise. The scheme, announced in 2015, provides loans up to Rs 10 lakh to existing micro enterprises in manufacturing, trading and services. So far in fiscal 2017-18, Rs 1.59 lakh crore of Mudra loans have been sanctioned, which is likely to fall short of the Rs 2.44 lakh crore targeted for the year. Loans amounting to Rs 1.22 lakh crore were disbursed in 2016-17. As much as 10-15 per cent of Mudra loans have gone bad, experts say, adding that this could be worrisome over the long term. The post-demonetisation cash crunch and GST will likely make it worse this year.
In 2017, a one-member committee of former cabinet secretary Prabhat Kumar submitted a report on the formulation of a 'national MSME policy' to the then MSME minister Kalraj Mishra. The commission, among other things, recommended the setting up of an apex national MSME authority under the prime minister, an institutional forum for constant consultation between the Centre and the states, the creation of a comprehensive MSME database, and creation of land banks by state governments with central support to promote small industries.
Budget antidote
Budget 2018-19 has addressed some of the concerns of MSMEs. The reduction in corporate tax rate to 25 per cent for companies with annual turnover up to Rs 250 crore will offer relief to 99 per cent of firms filing their tax returns, Union finance minister Arun Jaitley said in his presentation. The 'simplification' of the indirect tax regime is also likely to improve their compliance rate. "The low corporate income tax rate will [also] generate higher investible cash surpluses for MSMEs which, in turn, will create new employment opportunities," says Khaitan.
The allocation of Rs 3 lakh crore for the Mudra scheme in 2018-19 is expected to help millions of micro entrepreneurs access credit from the formal financial system and potentially generate job opportunities. The budget has also announced an additional Rs 3,794 crore in the form of credit support, capital and interest subsidy, which will help meet the credit demands of many companies.
On February 7, the Union cabinet also approved the change in criteria for classifying MSMEs from 'investment in plant & machinery' to annual turnover. With this, enterprises with up to Rs 5 crore annual turnover will be under the 'micro' category, Rs 5 crore to Rs 75 crore will be classified as 'small' enterprises, and above that till Rs 250 crore will be 'medium' enterprises. The government says the move will encourage ease of doing business, make the norms of classification growth oriented and align classification norms to the new tax regime revolving around GST.
Meanwhile, the government is expecting to finalise a roadmap to resolve the bad loans issue. "We are hopeful it will be ready by February-March," minister for MSMEs Giriraj Singh said on February 7.
Formalisation: Pain or gain?
Experts say that despite the pain the sector is going through, formalisation will help companies raise more funds at better rates in future. "GST compliance is improving in companies where a counter-party (to whom they are a supplier) insists on complying with the new taxes," says R. Vasudevan, business head, Crisil SME Ratings.
The issues affecting the MSME sector run deep and demand structural changes. While the budget sops and the easing of credit will be a relief, nothing short of a sharp focus on the sector will bring enduring solutions. MSMEs are big employers and form the backbone of big industry. The effect of quickfix measures will wane soon, leaving the distraught sector asking for more.
Financing woes
According to the ministry for MSMEs, there were 58.4 million such units in the country in 2017, mostly owned by individual proprietors, employing around 120 million people. Most of these units are outside the formal banking system, and hence are forced to borrow from informal sources or use their own limited funds. On top of this, the high incidence of taxes can be crippling.
Bengaluru-based Dashmesh Engineering is a 39-year-old company which makes machine tool accessories. Manjit Singh, the operations head, feels the 18 per cent tax on its products is "extremely high". "For businesses like ours, the tax should ideally be around 5 per cent," he says. Their vendors are unsure about how the GST operates. He found involving them in the tax network a big challenge. "For instance, inward purchases are not uploaded by my seller on time, resulting in protracted delays in our claims. This is affecting our reputation for no fault of ours," he adds. In addition, GST is applicable on labour jobs as well, unlike before, adding to the firm's burden. And then there are the technical glitches in filing GST. "Traders should not be penalised unnecessarily for technical failures of the GST portal. Also, the tax structure has to be rationalised. It's a proven fact that the lower the taxes, the higher is the compliance," Singh adds.
The MSME sector is also a big contributor to the rising levels of non-performing assets (NPAs) of banks. Reports say that bad loans from the Mudra scheme have been on the rise. The scheme, announced in 2015, provides loans up to Rs 10 lakh to existing micro enterprises in manufacturing, trading and services. So far in fiscal 2017-18, Rs 1.59 lakh crore of Mudra loans have been sanctioned, which is likely to fall short of the Rs 2.44 lakh crore targeted for the year. Loans amounting to Rs 1.22 lakh crore were disbursed in 2016-17. As much as 10-15 per cent of Mudra loans have gone bad, experts say, adding that this could be worrisome over the long term. The post-demonetisation cash crunch and GST will likely make it worse this year.
In 2017, a one-member committee of former cabinet secretary Prabhat Kumar submitted a report on the formulation of a 'national MSME policy' to the then MSME minister Kalraj Mishra. The commission, among other things, recommended the setting up of an apex national MSME authority under the prime minister, an institutional forum for constant consultation between the Centre and the states, the creation of a comprehensive MSME database, and creation of land banks by state governments with central support to promote small industries.
Budget antidote
Budget 2018-19 has addressed some of the concerns of MSMEs. The reduction in corporate tax rate to 25 per cent for companies with annual turnover up to Rs 250 crore will offer relief to 99 per cent of firms filing their tax returns, Union finance minister Arun Jaitley said in his presentation. The 'simplification' of the indirect tax regime is also likely to improve their compliance rate. "The low corporate income tax rate will [also] generate higher investible cash surpluses for MSMEs which, in turn, will create new employment opportunities," says Khaitan.
The allocation of Rs 3 lakh crore for the Mudra scheme in 2018-19 is expected to help millions of micro entrepreneurs access credit from the formal financial system and potentially generate job opportunities. The budget has also announced an additional Rs 3,794 crore in the form of credit support, capital and interest subsidy, which will help meet the credit demands of many companies.
Meanwhile, the government is expecting to finalise a roadmap to resolve the bad loans issue. "We are hopeful it will be ready by February-March," minister for MSMEs Giriraj Singh said on February 7.
Formalisation: Pain or gain?
Experts say that despite the pain the sector is going through, formalisation will help companies raise more funds at better rates in future. "GST compliance is improving in companies where a counter-party (to whom they are a supplier) insists on complying with the new taxes," says R. Vasudevan, business head, Crisil SME Ratings.
The issues affecting the MSME sector run deep and demand structural changes. While the budget sops and the easing of credit will be a relief, nothing short of a sharp focus on the sector will bring enduring solutions. MSMEs are big employers and form the backbone of big industry. The effect of quickfix measures will wane soon, leaving the distraught sector asking for more.
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