Budget 2021 Expectations: MSMEs, startups seek better debt access, GST relaxation, more from FM Sitharaman

Updated: Jan 31, 2021 4:09 PM

Union Budget 2021 Expectations for MSMEs: India’s complex tax and financial regulatory regime are one of the reasons for our low rankings across “Ease of doing business” indices globally. However, the present regime has consistently stressed its focus on making regulations simpler and our jurisdiction predictable for doing business.

MSME Budget 2021 Expectations, Budget 2021 Expectations for MSMEThe real need of the hour is the shift in approach from “regulation to empowerment” in terms of fiscal laws.

By Divakar Vijayasarathy

Union Budget 2021-22 Expectations for MSMEs: Union budgets are events similar to annual appraisals – every employee expects a promotion, additional emoluments, or at least a pay hike, however, not all demands are met nor can an organization sustain by acceding to all requests. Our hon’ble Finance Minister, much like the CFO of the country, need to balance expectations with abilities. Unlike a CFO who has the luxury of reporting only to the informed Board, she also needs to convince the electorate that this is the best for them and the nation. India, like most nations, has used, rather over-used, tax policy to drive larger national agenda, be it the investment deductions, accelerated depreciation, or tax holidays. To give a perspective, we have had nearly 1,000 amendments and clarifications on direct taxes alone over the past decade.

India’s complex tax and financial regulatory regime are one of the reasons for our low rankings across “Ease of doing business” indices globally. However, the present regime has consistently stressed its focus on making regulations simpler and our jurisdiction predictable for doing business. With Covid taking its toll on most MSMEs, the scene with most startups and e-commerce companies is cautiously optimistic. Some of the larger startups have reported fundraising at record valuations while established e-commerce companies have made the most of the “new normal”. However, mankind is never satisfied with where they are and the need to move ahead always comes with expectations for the future. In this regard, some of the most pressing demands from these sectors include:

  • Improved debt access to startups and e-commerce companies: While banks and NBFCs are competing to lending for brick-and-mortar businesses, startups and e-commerce companies struggle to raise debt from traditional sources and are compelled to consistently dilute equity to stay afloat. The tagging of startup loans as a priority sector has not had much impact on smaller startups. The budget should promote the setting up of a startup debt fund backed by the sovereign to improve debt access, according to Dr Arun Raghavan, Founder & CEO, ARH Digital.
  • Moderating HNI tax rates: The present peak tax rate of 43 per cent is a significant dampener for HNIs to continue investing in India. In a world where capital and geographies are fungible, money flows to jurisdictions with favorable terms and improved yields. As the Laffer’s Curve theory suggests, beyond a certain threshold, increasing tax rates would lead to decreasing collections and higher evasion. It is widely expected that the increased surcharge for HNIs would be rolled back.
  • Reducing GST on personal hygiene products: In aligning with our Hon’ble Prime Minister’s pet initiative of Swachbharat and also given the need for improved personal hygiene and sanitation post-Covid, GST on personal care products like soaps and sanitizers are expected to be moderated from 18 per cent to 12 per cent to make them more accessible to the common public, said AV Anoop, Managing Director, AVA Cholayil (Medimix) group.
  • Opening up the education sector for private investment: National Education Policy 2020 is a welcome document for the future of school education in India, however, it requires a committed administration with a vision to allocate enough money to achieve the lofty goals therein. For this vision to become a reality, if the private sector is allowed the freedom to infuse capital, domestic or foreign, into this much-starved sector with accountability, the returns on social capital would be extremely rewarding. The pressure on the exchequer would also be significantly reduced, said Biju Sudarshan, Chairman, Vikaasa Group of Schools.

Also read: Amazon expands vernacular support for MSMEs; adds another language for local sellers to sell better

  • Relaxing the GST thresholds for startups: According to Jagadeesh Kanna, Founder & CEO, Vaayusastra Aerospace, startups per se are an idea seeking commercial expression. In this regard, for their services and experiments to be commercially more attractive, if the government can expand the turnover limits for startups from 20/40 lakhs to 100 lakhs it would improve their survival chances. Further, not all startups would have raised enough funds to afford the services of a chartered accountant to manage their GST compliances.
  • Incentives for CAPEX investments: The present incentive structure provides for accelerated deduction for CAPEX investments in specified sectors. However, thanks to Covid, 2020 was a washout for CAPEX initiatives (down more than 20 per cent compared to 2019) as businesses were struggling for capacity utilization. It would be a welcome move to extend the accelerated deduction across sectors, at least for the next couple of years to encourage SMEs and corporates to increase CAPEX investments, noted Mehul, Director, Raj Petro Chemicals.
  • Complete resolution of Angel tax: The much-awaited clarification on angel tax was received last year. However, the threshold for exemption was restricted to Rs 25 crores of capital post issue. In the interest of promoting investment in startups and eliminating ambiguities, the present procedural hassles and thresholds need to be removed. The next phase of startup growth is going to be through companies delivering solutions for Bharat vs India and these entrepreneurs need easier access to funds and simpler compliance regimes and angel tax is an avoidable cog, according to Anand Nagarajan, Director, M by S Square.

While every expectation will have a reason and rationale, the Hon’ble Finance Minister, being the captain of the ship needs to consider multiple ramifications. However, the real need of the hour is the shift in approach from “regulation to empowerment” in terms of fiscal laws. Instead of focusing on the few who evade, thereby expanding the scope of stringent provisions, if the government diverts its attention on enabling the well-intentioned, it would send strong signals to both the domestic and global community on the way forward. Policymaking is a constant endeavor and does not happen only on or for the budget event. However, it becomes a great platform to amplify the direction and intent of the ruling dispensation. In a year battered by uncertainty and pain, we hope the budget brings in the desired cheer.

Divakar Vijayasarathy is the Founder & Managing Partner of DVS Advisors LLP. Views expressed are the author’s own.

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