Why is it in the News?

A new provision in the Income-Tax Act from Budget 2023-24 ensures prompt payments to MSMEs however, it's causing a problem: large companies are cancelling orders from registered MSMEs and giving them to unregistered ones.

Context:

• The Union Budget 2023-24 brought in a fresh provision in the Income-Tax (IT) Act to ensure timely payments to micro, small, and medium enterprises (MSMEs) within 45 days of supplying goods or services.
• Yet, this measure has led to an unusual issue: big corporations are cancelling orders from registered MSMEs and redirecting them to unregistered ones.

What is the Latest Tax Compliance Guidelines for MSMEs:

• In India, businesses typically record expenses as they occur (accrual basis), regardless of whether payment has been made.
• However, under Section 15 of the MSMED Act 2006 and the newly enacted Section 43B(h) of the IT Act, businesses are obligated to settle payments with MSME Registered Enterprises within 15 days or up to 45 days if stipulated in an agreement.
• Failure to adhere to this regulation results in the inability to deduct these payments as expenses in the same fiscal year, potentially increasing taxable income and business taxes.
• Moreover, delayed payments to MSME-registered units incur interest liabilities, placing the responsibility on the payer to fulfil outstanding dues.

What is MSME?

• MSMEs are Micro, Small, and Medium Enterprises that are usually involved in the manufacture and production of goods and commodities.
• These business enterprises are the backbone of a country’s development and provide holistic development to the rural and urban population of the country.
  • The MSME sector in India makes a contribution of around 30% to the nation’s GDP.
  • Moreover, it contributes about 40% to the total exports of India, and
  • It provides more than 110 million job opportunities in the country.
• The Government of India introduced the MSME under the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006.
  • MSMEs are managed under the Ministry of MSMEs.
• The objective of MSMEs is to primarily engage in manufacturing, processing, production, and preservation of goods and commodities.
• These business enterprises play an important role in the socio-economic development of the country.
• Thus, the importance of MSME in the growth and development of India is vital.

MSME Classification:

• Businesses are classified as micro, small or medium enterprises based on their turnover and the sector they operate in (manufacturing/services).

Types of MSME:

According to the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, MSMEs are of 2 types:

• Manufacturing Enterprises: Business enterprises that are involved in the manufacturing of goods, as stated under Schedule I of the IDRA 1951, are categorised as MSMEs.
  • Additionally, all business enterprises that contribute value to the finished products by making use of plants and machinery also come under MSMEs.
• Service Enterprises: Business enterprises that provide services and come under the category of ‘enterprises’ as stated in the MSMED Act are service enterprises and come under MSMEs.
  • However, individual service providers do not qualify as service enterprises.

Importance of MSME in the Indian economy:

• Export: MSMEs’ contribution to the exports from India was recorded at 45.56% till Sept. 2023.
  • Such high volumes of exports facilitate international trade and contribute to industrial growth within the country.
• Employment: MSMEs create employment in rural and urban areas of the country.
  • These business enterprises are the second largest employment sector in India after agriculture.
  • By setting up units in rural and underdeveloped areas, MSMEs contribute to the better living standards of people from lower socioeconomic and rural areas as well.
• Innovation: MSMEs bring innovation to various processes in the manufacturing of goods and commodities.
  • They provide the necessary skills, tools, and technology for automation and advancement in their sectors.
  • It contributes to the overall technological upgradation of the country and promotes research and development.
• Entrepreneurship: MSMEs promote inclusiveness in the country by facilitating the entry of aspiring entrepreneurs in various sectors.
  • They promote healthy competitiveness among entrepreneurs, which fuels industrial growth.

Challenges faced by the MSME sector in India:

• Financial: Access to finance is a significant hurdle for MSMEs, with only 16% receiving timely finance.
  • This forces them to rely on their own resources, hindering their growth prospects.
  • Even larger firms struggle to access cheaper credit from formal banks.
• Regulatory issues: MSMEs face challenges with tax compliance and labour law changes, which have proven costly.
  • Despite attempts to make the sector more competitive, compliance with regulations and tax registration remains difficult, leading to low capital and business closures.
• Infrastructure: India's infrastructure is crucial for the MSME sector, especially in the outsourcing industry.
  • However, inadequate infrastructure affects their efficiency and ability to compete globally, limiting their growth potential.
• Low productivity & Lack of innovation: MSMEs may lack high productivity but offer value through cost efficiency and providing goods at lower prices.
  • However, their small-scale production and low margins put them at a disadvantage compared to larger firms.
  • Indian MSMEs often rely on outdated technologies and lack entrepreneurs who embrace new tools and technologies.
  • This hampers their productivity and competitiveness, especially when compared to larger firms in sectors like e-commerce and call centres.
• Technical changes: MSMEs have faced significant technical changes over time, impacting their growth potential.
  • Changes in land ownership rights have led to mismanagement and reduced productivity, highlighting the need for adaptability.
• Competition & Skills: MSMEs face fierce competition from larger firms, exacerbated by the rise of e-commerce and globalization.
  • While competition is not new, MSMEs struggle to withstand the pressure in areas such as agriculture, garments, and tourism.
  • MSMEs lag behind in terms of skills compared to their counterparts in other countries.
  • Dependence on informal workers with limited technical skills hampers productivity and forces smaller firms into low-skilled jobs, hindering long-term growth.
• Lack of professionalism: Many Indian MSMEs lack professionalism, making them vulnerable to corruption and abuse of power.
  • This significantly impacts their business productivity and overall growth.
• Lack of standardized policies: India lacks consistent MSME policies, resulting in inconsistent development and entrepreneurship promotion programs.
  • While progress has been made in Delhi, nationwide efforts are necessary for Indian firms to compete globally.

Government MSME Schemes and Policies in India:

• FIRST: Keeping in view the crucial role MSMEs play in the development of the country, the central government announced the launch of FIRST (Forum for Internet Retailers, Sellers, and Traders).
• The program aligns with the government’s Digital India movement and educates and informs MSMEs about opportunities to become self-reliant and digitally capable.
• MSME Innovation Scheme: Under this scheme, MSMEs can enjoy reimbursement of the cost of Intellectual Property Rights applications for new ideas and designs.
  • The programme provides financial and other resources to MSMEs to encourage innovation.
• CGTMSE: The Credit Guarantee Trust Fund for Micro and Small Enterprises scheme provides financial assistance of up to ?2 Crore to new businesses.
• CLCSS: The Credit Linked Capital Subsidy Scheme provides capital subsidies to MSMEs operating in the khadi, village, and coir sectors.
  • The subsidy allows these businesses to acquire technological innovation and upgradation.
• ASPIRE: ASPIRE, or A Scheme for Promotion of Innovation, Rural Industries, and Entrepreneurship, fosters innovation and entrepreneurship in rural and agricultural sectors by establishing advanced technology networks.
• Pradhan Mantri Mudra Yojana (PMMY): The PMMY scheme provides loans up to Rs. 10 lakhs to MSMEs.
  • The scheme has three categories of loans: Shishu (up to Rs. 50,000), Kishore (up to Rs. 5 lakhs), and Tarun (up to Rs. 10 lakhs).
  • The loans do not require collateral and are available to both new and existing MSMEs.
• Stand-Up India: The Stand-Up India scheme provides loans up to Rs. 1 crore to SC/ST and women entrepreneurs for setting up new ventures in the manufacturing, services, or trading sectors.
  • The scheme aims to promote entrepreneurship among these communities and provides support through the entire loan process.

Way Forward:

• Creating awareness about government schemes and initiatives: Stakeholders should take active measures to educate MSMEs about the various schemes and initiatives launched by the government to promote SME financing.
  • This will help MSMEs take advantage of these schemes and secure financing for their businesses.
• Developing innovative financing solutions: Financial institutions should develop innovative financing solutions that cater to the unique needs of MSMEs.
  • These solutions can include alternative credit scoring mechanisms, digital lending platforms, and other innovative solutions that reduce the reliance on collateral and traditional credit histories.
• Encouraging private-public partnerships: Private-public partnerships can be a powerful tool to promote SME financing.
  • Governments and private sector companies can work together to develop financing solutions that are tailored to the needs of MSMEs.
• Reducing the cost of credit: High interest rates on loans can be a significant barrier for MSMEs to secure financing.
  • Stakeholders should take measures to reduce the cost of credit for MSMEs, which will make it easier for them to invest in their businesses and drive growth.
• Leveraging technology: Technology can play a crucial role in improving SME financing.
  • Stakeholders should leverage technology to develop digital lending platforms, credit scoring mechanisms, and other solutions that can reduce the cost and time involved in securing financing.

Conclusion

MSMEs are vital to India's economy, driving exports, employment, innovation, and entrepreneurship. Although they face financial, regulatory, and infrastructure hurdles, fostering a supportive environment through awareness, innovative financing, partnerships, cost reduction, and technology can empower MSMEs to overcome challenges and significantly contribute to India's socio-economic growth.