In spite of MSMEs' immense contribution to the economy, successive governments have not really addressed the unique problems faced by MSMEs. Even today, access to formal lending and credit facilities remains a challenge.
By Dinesh Agrawal & Mayank Jain
It is common knowledge that micro, small and medium enterprises (MSME) are the growth engines of India. They are, undoubtedly, amongst the most important sources of entrepreneurship and innovation. As per Government data (January 2019), India currently has approximately 63 million MSMEs that contribute to 45 per cent of the manufacturing sector, nearly 31 per cent to the services sector and collectively employs over 110 million Indians. Coupling this with the fact that India aims to be a $5 trillion economy by 2025, the national and strategic importance of this sector cannot, and should not, be overlooked.
In spite of their immense contribution, successive governments have not really addressed the unique problems faced by MSMEs. Even today, access to formal lending and credit facilities remains a challenge. This was compounded by the left-right punch combination of demonetization and GST which effectively wiped out cash from the economy – the funding source that almost all MSMEs operate on.
The introduction of GST came with its own set of problems. The withdrawal of excise exemptions to MSMEs having turnover below Rs 1.5 crore coupled with the compliance requirement of filing multiple returns, a sudden shift to a monthly-based tax payment system, and adoption of information technology were among a set of teething issues faced in July 2017 and onwards. Further, despite the availability of composition scheme, most MSMEs, being intermediate suppliers, were obligated to obtain registration as regular taxpayers under GST to stay within the credit chain – else, they ran the risk of being alienated by manufacturers and big retailers or be deprived of inter-state trade. Only 22 per cent of the eligible taxpayers opted for composition scheme.
Given the bleak history and government apathy, it is heartening to note that the GST Council has taken stock of quite a few issues plaguing this sector to suggest constructive improvements in the bare minimum, to GST law. A special mention must be made of the recommendations of the Group of Minister (GoM) for MSMEs and 32nd meeting held on January 2019. GoM recognized the challenges faced by the MSME sector and the need to support them by reducing excessive compliance under GST.
To mitigate the woes of MSMEs, on the recommendation of the GoM, the GST Council has increased threshold limit for registration to Rs 40 lakhs from Rs 20 lakhs (not applicable to service providers) and for availing composition benefits from Rs 1.0 crore to Rs 1.5 crore including services under the composition scheme. The compliance burden is mitigated by allowing quarterly payment of taxes; and one return per annum. Another surprising but very helpful is a provision of free software to small taxpayers. The option to allow quarterly payment is most welcome, as easy availability credit is the bane of the sector. This will allow the easing of working capital requirements.
Need for Adoption
The slew of measures announced has mostly been adopted and operationalized by the government vide amendments carried out till March 2019. This clearly shows that government and constitutional functionaries are indeed listening to Indian businesses and attempting corrective courses of action. Although the rise in the threshold for composition scheme is not expected to help MSMEs as most of them are either intermediate B2B suppliers or undertake inter-state and e-commerce trade eased compliance will go a long way.
MSMEs are fast learning the hard realities of the GST regime. Exemptions are not going to come back. Compliance has been eased. MSMEs need to avail these advantages and relaxations granted by the GST Council and focus on productivity and supply chain to become competitive.
(Dinesh Agrawal is Executive Director and Mayank Jain is Principal Associate at Khaitan & Co. Views expressed are the authors’ own.)