The financial year 2018-19 witnessed several outreach initiatives for the MSMEs. Considering the critical importance of the sector, the government in 2018 made several welcoming announcements such as unveiling of the 12 key initiatives, launch of the 59-minute loan portal, enhancing the percentage of the mandatory procurement by CPSEs and simplification of the procedures for minor offences under Companies Act to boost the growth and expansion of the sector.
In addition to the above initiatives, the government as part of its continuous exercise, invites the inputs from the industry in the form of recommendations for the pre-budget memorandum to optimise and allocate the resources for the benefit of the various sectors considering the views of the stakeholders. CII, in view of the same, submits its recommendation each year for the consideration in the budget and this year too has submitted the following recommendations to the Ministry of Finance.
At first, upgradation of research, development and innovation is the need of the hour for MSMEs, considering which, some suggestions are proposed: firstly, restoration of incentives in the form of weighted tax deduction from 150 percent to 200 percent on the expenses done on R&D. Secondly, provision of incentive in the form of tax deduction creation of corpus/fund for technology adoption by setting aside 10-25 percent of the total profit for utilisation within the next five years. At last, order preference up to 25-50 percent against government tenders be allowed to research and development.
According to data available, 15 percent of the credit is met through the organised financial sector and the remaining 85 percent is met through the unorganised financial sector which comprises of co-operative banks, co-operative banking societies and funds from relatives, friends etc. Though these organisations are licensed and regulated by the concerned authorities, the same needs to be equipped with the compliance facilities like e-KYC, CIBIL registration, government-sponsored schemes for distribution etc. Hence, reinforcement of the ‘unorganised sector’ for enhancing access to credit, which would result in the fulfilment of the government’s objective of parity and financial inclusion.
The third recommendation of CII is for encouragement of service sectors, that the tax slabs for the professional services should be reduced and the threshold limit for payment of GST on turnover/professional receipts of professional service providers to be abolished. Also, MSMEs that do not have offices in the state being visited, should be permitted GST credit on hotel stay in another state. Presently, it is allowed only if the company is registered in the state, which does not have a pitfall for large companies with outlets and GST Registration in most states, but smaller companies like MSMEs are at disadvantage.
Further, it has been observed that, 40 percent of GEM suppliers are MSMEs and as GEM has converted overall Rs 2 lakh crore of business in two years, this means Rs 40,000 crore are purchases from MSMEs. In GEM, for procurement of value over Rs 10 lakh, the buying PSU/ department is required to deposit the amount in a ‘pool account’ or wallet so that GEMs can ensure timely payment. For smaller values, GEM has to seek payment from the buyer after purchase. These are often delayed and the sufferers in most cases are MSMEs who supply small value tenders. A fund of say Rs 3000 crore (one month of MSME purchases) should be created for use of GEM as a ‘bridging’ finance so that GEM can make timely payment to registered MSMEs in cases where the buying entity has delayed in making funds available through GEM.
It is further recommended that simplification of the bonus act should be done. Only cap it at not exceeding 20 percent of firm’s profits for the year, eliminating all calculations of ‘carry forward’ and ‘set-off’, variable percentage of bonus etc. Maternity pay benefits should be funded by ESI if the person has been a member for more than 12 months prior to delivery. Eligibility limit for ESI membership should be raised to Rs 20,000 per month. Dividend distribution tax should exempt dividends by MSME.
Also, not only the new or incremental, but all SMEs (exempting the mediums) to be provided with interest subvention for MSMEs and all loans. Capital gains on sale of industrial land and building to be exempted from capital gains tax if invested in another industrial property / government bonds as allowed for house property and indexed for determining tax liability.
At the end it has been recommended that growing MSMEs should be supported rather than being penalised by the current tax provisions, which brought forward budgetary taxation proposal. Presently, capital gains on sale of industrial land is fully taxable, even if re-invested in purchase of another industrial land or property. Hence, it is a big hindrance for companies that have grown and need to move to larger premises.
CII recommends that the capital gains on sale and re-investment of proceeds of industrial property be given the same tax treatment as available for residential property, viz., complete exemption from capital gains tax if re-invested in purchase of other industrial property or specified investments with a specified lock-in period. It would be good if this can be put up through the appropriate CII channels to the finance ministry while also enlisting the support of the MoMSME. This would provide a plethora of advantages to industries. No penalisation of growing industries if it needs to move into better suited premises.
Under present tax rules, if a company were to sell and move to another location, it would end up losing 30 percent of its value of property. This is a deterrence to growth, and possibly encourages understating the value of sale, thereby generating unaccounted money and reducing the on-record investible funds available to the enterprise. Also, it acts as a disincentive to re-locate outside of areas that have over time become urbanised and no longer desirable or permissible as an industrial location. In case of re-locating, though it may be an advantage to the economy and regional development, there is a major penalty to the individual entity.
Sreekant Somany is the chairman of the CII Council on MSME.