Credit and finance for MSMEs: With financial and digital inclusion ranking high on the government’s agenda of economic growth, the role of fintechs in that vision can’t be emphasized enough. Their model to provide affordable, faster and cheaper credit and digital financial services to businesses, particularly micro and small enterprises has enabled the latter to remove barriers to scale to some extent. Ahead of the union budget 2023-24, which will be presented on February 1, 2023, in Parliament by the finance minister Nirmala Sitharaman, fintechs serving MSMEs have suggested some tax sops they believe would help them strengthen the government’s goal.
Deepak Kothari, Co-founder of digital payments and loans company ftcash, which caters to micro and small enterprises, for instance, has asked for rationalisation of input tax credit mechanism in Goods and Services Tax (GST) with respect to co-lending arrangements.
“Fintechs today collaborate with other financial services players and invariably in such arrangements there’s a potential loss of input credit in the current GST framework. Ensuring that the input credit is fully provided for will go a long way in ensuring that revenue leakages are avoided and benefits can be consequently passed on to the end consumer,” said Kothari.
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Input credit essentially means that during the payment of tax on the output, which is the final product, one can reduce the tax amount he has already paid on inputs or purchases made and pay the remaining amount in taxes.
Fintechs have also sought relaxation in GST levied on financial inclusion services provided by business correspondents which are basically retail agents engaged by lenders for providing financial services. For instance, PayNearby — which partners with micro entrepreneurs running neighbourhood retail stores and enable them with the tools to provide financial and digital commerce services to their local customers such as cash withdrawal, cash deposits, money transfer, savings, insurance, travel, Digital Payments, access to government benefits, etc., — operates through business correspondents.
Anand Kumar Bajaj, Founder, MD & CEO of PayNearby said over 90 per cent of the company’s business correspondent network is focused on tier II and beyond regions, serving as banking hubs in locations with limited financial infrastructure.
“To ensure the viability of this network in offering uninterrupted services to all across the country, we sincerely hope that in this budget, the GST and TDS for financial inclusion services at business correspondent outlets to be waived off or at least reduced. This will ensure sustainable growth and inspire more and more last-mile retail banking agents to offer seamless banking services from their stores to all citizens in Bharat,” said Bajaj.
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Particularly for financial or banking services to be accessible to entrepreneurs in the hinterland, which needs technology, security, trust and the necessary government support, Bajaj also requested for tax benefits on the total expenditure incurred by fintechs involved in the financial inclusion mission. “A GST subsidy, even in a small percentage, will go a long way in helping banking services and government benefits reach the masses with much ease.”
Moreover, peer-to-peer lending platform LenDenClub, which operates MSME and personal loan app InstaMoney, also urged for tax benefits in the budget. Bhavin Patel, CEO and Co-founder, LenDenClub said P2P lending has evolved as a prominent investment asset class, ensuring the flow of investments from those with excess to those in need.
“While we work to meet the credit demands, we need assistance from the government to open the supply side by incentivising P2P lenders with tax exemptions up to a certain income. Further, it should allow bad debt write-offs, enabling defaults to be treated as capital losses during filing returns,” said Patel.
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Importantly, the MSME loan market has grown from Rs 31 lakh crore in March 2020 to Rs 33 lakh crore in March 2021 to Rs 35 lakh crore in March 2022 and Rs 36.4 lakh crore as of June 2022, with 88 per cent of registered borrowers belonging to micro segment, 10 per cent to small segment and only 2 per cent to medium segment, according to a report by professional services firm KPMG in November 2022 on non-banking financial companies (NBFCs) and housing finance companies (HFCs).