Govt May Boost Employment In Labour-intensive MSMEs In Budget: Sandeep Agrawal, TeamLease RegTech

With an 8.2 per cent gross domestic product (GDP) growth during the financial year (FY) 2023-24, India maintained its position as one of the fastest-growing major economies in the world. Notably, Indian micro, small and medium enterprises (MSMEs) and startup sectors have further boosted this growth. 

Concurrently, India has over 70 million MSMEs, creates over 111 million jobs and contributes nearly 30 per cent to the nation’s gross domestic product (GDP) and the 40 million MSMEs registered through the Udyam certification have reported nearly 190 million jobs, an increase from 90 million in 2022.

Ahead of the union budget 2024-25, Sandeep Agrawal, Co-founder and Director, TeamLease RegTech has said that the government may promote schemes to boost employment generation in labour-intensive MSMEs. In an interview with BW Businessworld, he stated, "The 2024 Budget should consider extending the tax exemption period from three years to five years without limiting the number of years within which the exemption can be availed/ claimed by a startup." Edited excerpts:

What are your major expectations from the Union Budget 2024? What are the projected growth rates for the MSME sector in the upcoming fiscal year, and what budgetary measures will support this growth?

Over the past eight years, the Department for Promotion of Industry and Internal Trade (DPIIT) has been actively promoting entrepreneurship and ease of doing business. It has recognised over 141,000 entities under the startup scheme, which has in turn generated direct employment for over 1.2 million people. The MSME sector is projected to reach USD 1 trillion in the next five years with a seven per cent expected growth in FY24.

While the current schemes offer several benefits, there are still lingering issues within the framework. The 2024 Budget should consider extending the tax exemption period from 3 years to 5 years without limiting the number of years within which the exemption can be availed/ claimed by a startup. At present, among the over 1,41,000 enterprises, only 3,000 have been granted income tax exemption.

Furthermore, DPIIT has been advocating for the removal of the angel tax to improve capital formation in the country. Removing the angel tax will give MSMEs and startups complete access to investible funds raised by them. This will be a shot in the arm for the industry during a downturn in fundraising.

How can the government help the industry to solve issues such as delayed payments, debt and concerns regarding the Digital Competition Bill?

There are already mechanisms in place to resolve the issues around delayed payments. For instance, Section 15 of the MSME Development Act, 2006 mandates payments to micro and small enterprises within 45 days. The 2023 union budget also introduced a tax deduction for corporations on payments made to MSEs, incentivising expeditious payments to micro and small businesses. An online portal “MSME Samadhan”, was also launched to aid MSEs in the settlement of disputes related to delayed payments. 

Furthermore, section 16 of the MSMED Act also imposes a penalty on delayed payments with an interest rate that is compounded at three times the bank rate. The government needs to introduce stricter actions against companies that are repeatedly delaying payments. Harsher penalties such as fines will push businesses to ensure timely payments.

To reduce debt-related issues, the government can further expand the credit guarantee scheme to cover a wider range of MSMEs, allowing for higher credit availability for enterprises. The ceiling for availing credit guarantees under the Credit Guarantee Scheme for MSMEs was raised from Rs 200 lakh to Rs 500 lakh per borrower to increase the protection for lending institutions. In FY23, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) approved over Rs 85,000 crore in guarantee payments, more than double when compared to FY22. 

However, the guarantee coverage is capped at 85 per cent. This dissuades lending institutions (LIs) from extending credit to MSEs, which may be considered risky. The government can consider increasing the coverage for micro and small enterprises to push LIs to sanction more loans to MSEs.

For MSMEs struggling with significant debt, it can introduce schemes to allow MSMEs to restructure their debt along with a one-time settlement agreement. Promoting priority lending for these enterprises through MSMEs with a dedicated sector can also aid in improving credit availability.

The digital competition bill is being pushed to create a level playing field for all MSMEs. While it will affect the collaboration and contracts between large digital platforms and small enterprises, it will also enable these enterprises to develop and grow. However, there are also significant disadvantages that need to be addressed. The bill needs to make concessions wherein large platforms can help MSMEs grow while curbing anti-competitive behaviour.

Will there be an expansion or enhancement of credit schemes like the Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs? Are new subsidies or grants planned for MSMEs, particularly those in critical sectors like manufacturing and technology?

The ECLGS scheme provided 100 per cent guarantee coverage to banks and NBFCs to enable them to extend emerging credits to meet their working capital requirements. The scheme supported MSMEs in meeting their operational liabilities and restarting their business by mitigating the effect of pandemic-induced disruption. With the economy recovering post-pandemic, the government did not extend the scheme past its March 2023 deadline.

However, the 2023 union budget saw an INR 9,000 crore corpus for the revamped Credit Guarantee Scheme for MSMEs. As per the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), over Rs 85,000 crore in guarantee payments were approved in FY23. In addition, the collateral-free guaranteed credit ceiling was raised from Rs 200 lakh to Rs 500 lakh.

The government may promote schemes to boost employment generation in labour-intensive MSMEs. The numerous PLIs already have a component of domestic value addition to promote technological infusion and local manufacturing of products.

Can MSMEs expect any reduction in corporate tax rates or other tax incentives? Will there be further simplification of GST procedures specifically tailored for MSMEs to ease compliance burdens?

There have been calls for the reduction of corporate tax for MSMEs along with simplification of the goods and services (GST) regime. While there are tax benefits for MSMEs and startups, such as a tax holiday for MSMEs for five years from the start of production. MSMEs can also opt for the presumptive taxation scheme, eliminating the need to maintain a book of accounts and reducing their compliance burden. 

Startups operating in the MSME sector also receive exemptions from capital gains tax on investments made by qualified investors. Given the importance that is attached to EoDB by the government, we can expect the budget to ease the compliance burden on MSMEs to eliminate the formalisation tax, pushing more and more enterprises into the mainstream economy.