The Finance Minister has announced the Budget 2016 largely focused on a healthy dose of circumspection in light of an adverse global economy and a focus on the basic and poorer constituents of the Indian economy. Though there were initial apprehensions on meeting the fiscal consolidation plan, he has committed to adhere to the fiscal deficit target at 3.5% for FY17. With a higher expenditure plan, this commitment brings a challenge in focusing on all sectors of the economy. He has therefore outlined a nine pillar transformative agendafor the economy focusing on key areas of social welfare, agriculture and the rural sector.Unfortunately, the Budget expectations for MSME fall short of expectations.
According to the MSME Annual Report 2014-15, contribution of the sector to the Indian GDP currently stands at 38 per cent and contributes to 45 per cent of industrial output employing over 100 million.While an increased outlay under the PM Mudra scheme of INR 1.8 lakh crore from INR 1 crore was announced, there was little focus on alleviating the issues plaguing the sector. Typical constraints faced by the sector include high working capital requirements and input costs and the inability to procure funds at reasonable cost. Multiple regulatory requirements also create bottlenecks in efficiently managing a business and generating cash flows. The Budget did not address these issues directly. There was also little focus given on industrial corridors and smart cities which had been flagship projects in earlier years in which the contribution of MSME sector is potentially large.
However, the Budget did mention a few areas which will have a positive impact on the sector. The Finance Minister provided his commitment to ensure progress on the GST bill as well as the introduction of a bankruptcy code. These measure will help bring costs down and aid in exit. On the legal front a framework for dispute resolution and re-negotiation of PPP projects and public utility contracts was proposed including amendments in Companies Act to improve enabling environment for start-ups. In addition, 13 cesses, levied by various Ministries in which revenue collection is less than`50 crore in a year will be abolished.If properly implemented, these will assist in the ease of doing business and bring compliance costs down significantly.
In the area of taxation, there were a few announcements which aid startups and MSMEs. New manufacturing companies incorporated on or after 1.3.2016 will now have an option to be taxed at 25% with surcharge and cess, provided they do not claim profit linked or investment linked deductions. For startups in an investment phase, this can help marginally as they are unlikely to declare profits initially. The Finance Minister also announced a lower corporate tax rate for the next financial year for relatively small enterprises. Such companies will receive a 100% deduction of profits for 3 out of 5 years for startup setup during April 16 to March 19. MAT will be applicable in such cases.
While a few of these measures may have a positive impact, a lot is left on implementation which has been an area of concern in the past. With initiatives such as “Make in India” here to stay, it is important that the Government review some of the key ills affecting the MSME sector and work out targeted policies in re-boosting growth and providing a conducive platform for the sector to operate.
