Here's What Startups and MSMEs Expect

The government in various forums has communicated and demonstrated that MSMEs are the backbone of the Indian economy

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India has come out graciously from the COVID-19 economic impact and according to the government, we have done a V-shaped recovery. This shows signs of growth and strong economic fundamentals and efforts put in.

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The government in various forums has communicated and demonstrated that MSMEs are the backbone of the Indian economy. “MSME is the backbone of Indian economy. It contributes around 29 per cent towards the GDP growth. Around 49 per cent of the exports are from the MSME sector. MSME has also generated approx. 11.1 crore jobs,” said a government press release. Due to the COVID-19 pandemic and nationwide lockdown, the MSME sector has been facing massive liquidity and supply issues, shortage of labor and non-payment of dues. However, the central government announced several schemes and relief packages to boost the MSME sector in the current situation, but experts of this sector feel that the government needs to take more steps to boost the MSMEs.

Her are a few expectations from the upcoming Union Budget.

Reduced corporate tax rate

In the current scenario, apart from company, many MSMEs are running as proprietorship or partnership or LLP and the tax rate of the partnership firm and LLP is 30 per cent. In order to boost MSMEs, the government should reduce the tax rate up to 20 per cent. 

Increase the deduction threshold limit of section 80C and decrease the interest rates on loans or a continued moratorium on existing loan payments also give a boost to MSME and startups.

Capital gains tax amendments

LTCG should be abolished as the government is currently charging both LTCG as well as securities transaction tax. This will help budding entrepreneurs immensely by allowing them to get funds from foreign FIs, venture capital funds or private equity funds.   

To promote investment in these funds, the government may notify such funds under the provisions of section 54EE which shall provide finance only to startups.

Ease in foreign investment as all inflows and outflows of funds into and outside India must go through the stringent RBI guidelines, these guidelines become blockers for foreign investments into India especially for the small sector as they don’t have sufficient resources to meet those guidelines. In order to give a boost to the small sectors, these guidelines should be made in such a manner so that even a small person can comply with those with minimum resources, time and funds.

All persons (including companies, individuals etc.) are paying tax on their income as well as the capital gain tax on capital appreciation over the period of time or dividend tax on the distribution of profits which is nothing but double taxation on the same amount of profit. India is already having a higher rate of tax as compared to other countries and again it is increased by surcharge also. And these higher taxes discourage foreign investors from investing in India. These kinds of double taxation should be removed, and rates of taxes should be reduced.

Supportive GST environment

If we talk about GST, GST law becoming more stringent day by day instead of becoming simplified. As per the latest government notification, it is mandatory (with few exceptions) required to pay 1 per cent of GST liability in case if taxable sales during the month are more than 50 lakhs without allowing set-off of the input tax credit. The time limit for GST registration has been increased. Additional powers have been given to the GST officers for the cancellation of registration. All these new requirements do not only increase the time of the MSME but also increase the cost of small sectors which will ultimately give rise to harassment and as well as corruption. In order to give a boost to these small sectors, these procedures should be simplified.

The provisions which have already been drafted must not be changed at least for a certain period of time. This would reduce the compliance burden on MSME and start-ups.

Structured tax holiday periods

Tax holiday is a good initiative taken by the government. Likewise, tax holidays more incentives required to be introduced by the government to encourage the employers as well as employees which can be done by providing more tax exemptions/deductions, etc.

Easier finance or lending provision

In India traditionally nationalize/private banks and NBFC’s are primary lenders and generally, lending is backed by tangible collaterals. Startup’s by virtue of their business model lack tangible securities and also market capitalization- hence largely deprived of standard lending.  It is practically difficult for the start-up sector to comply with banking formalities and majorly they become cumbersome for the startup to comply with the laws. Further, there is no specific finance system that is stable by the government in this regard to help the new-age companies.  Therefore, the government should create a system for making funds through which startups can obtain finance with less banking formalities.