Industry body Assocham along with public policy organisation EGROW Foundation on Thursday released an exhaustive study on the challenges faced by MSMEs in the country and suggested solutions to address them. The study was based on a survey conducted in August this year including quantitative data of over 150 companies from the survey with feedback from around 120 industry stakeholders.
According to the report, MSMEs across India face key challenges related to access to finance, compliance with taxation and labour laws, obtaining business registrations, and securing clearances from various departments.
For many MSMEs, particularly individual proprietorships with limited resources, ensuring compliance can be a substantial challenge. This regulatory burden directly adds to the cost of doing business, accounting for a considerable portion of their overhead expenses, the report said.
To address the issue of strict penalties faced by MSMEs for delays in GST payments or return filings, the report said the government should introduce a tiered penalty structure that takes into account the severity of the delay and the reasons for it. It called for clear guidelines for justifiable delays and offering leniency in such cases to help reduce the financial burden on MSMEs.
Moreover, to ease the administrative burden on MSMEs, the report suggested a single GST registration across states, instead of state-specific registration, allowing businesses to operate under one unified GST number while still complying with tax obligations in different states.
The report also suggested the GST Council to include at least one MSME representative to ensure that the concerns of the MSME sector are adequately addressed.
Further, reducing the Corporate Income Tax for MSMEs from 25 per cent to 15 per cent would provide significant financial relief, it said.
Among other taxation-related suggestions were implementing a consolidated, calibrated GST and income tax system as a percentage of turnover for single-product MSMEs, reducing the TDS burden on MSMEs by limiting tax deduction requirements to only salary payments and payments to non-residents, and establishing a combined taxpayer unit to address both direct and indirect tax needs for MSMEs.
Delayed payments
The report said the revised 45-day payment rule introduced this year has not been effectively enforced, especially among public sector undertakings and large firms as many larger entities continue to delay payments.
To address this, the report suggested strengthening enforcement and monitoring mechanisms to improve compliance mandated by Section 43B of the Income Tax Act.
“This can be achieved by developing automated systems that track payment timelines and identify delays, particularly among public sector undertakings. In addition to enhancing monitoring, stricter penalties for non-compliance should be introduced. Beyond the current loss of tax deductions, companies that fail to meet the 45-day deadline should face fines or interest charges on delayed payments,” it said.
For firms hesitant to place orders with registered MSMEs due to the shorter credit window leading to many MSMEs to deregister, the report said the government should introduce flexible payment terms that allow longer credit periods for such enterprises.
“This would encourage larger firms to place orders with registered MSMEs while still ensuring timely payments. Additionally, the government could facilitate partnerships between MSMEs and larger firms by promoting collaborative business models that establish mutually beneficial payment cycles, thereby building trust and improving relationships. Offering incentives, such as tax benefits or preferential treatment in government contracts for timely payments, would further motivate larger companies to engage with registered MSMEs instead of opting for unregistered ones.”
Credit access
To boost credit access for MSMEs, the report called for enhancing the role and reach of MUDRA banks and other financial institutions. Additionally, the government should introduce specific loan products designed for micro and small enterprises that do not require extensive documentation or collateral.
Eliminating commitment charges for unused credit facilities, waiving annual processing fees, enabling easy loan portability, and automating the release of bank guarantees when no claims are made within the validity period were among other suggestions to improve banking and finance for MSMEs.
Among other key suggestions by the report to boost the MSME sector were:
- Establish a dedicated MSME Coordination Council to streamline scheme implementation, address inter-state differences, and promote compliance.
- Develop an MSME Policy Index to measure and improve state-level performance in MSME policy adherence and implementation.
- Implement a comprehensive single online verification system for MSMEs to upload all necessary registration documents, with real-time updates on the status of applications to eliminate the current need for multiple submissions, follow-ups and physical appearances by company directors.
- Set up a centralised grievances portal similar to the RBI’s Ombudsman system for MSMEs to raise issues related to various departments and state governments.
- Since wage levels vary significantly across states, establish universal minimum wage rates across India to foster a more equitable labour market and fair compensation for all workers, regardless of their location.
- Extend the non-performing assets (NPA) cycle for MSMEs to 180 days from the current 90 days.
- An annual survey of MSMEs is required as the lack of recent data on MSMEs (last census in 2005/06, NSSO data from 2015/16) is a major obstacle to effective policymaking.