7 Cherries for MSMEs in The Union Budget 2020

By Faiz Askari, Founder of SMEStreet

Apart from the fact that Union Budget 2020 had experienced lowest Budget speech  while presenting the Union Budget to the Indian Parliament, this budget has some level of relief for MSMEs but on the other hand some expectations still remained undiscussed. Among this list of much-awaited but not discussed expectations from MSMEs — the MSMEs’ expectation for Fund of Funds remains on top. This fund was expected and even predicted by several experts who are part of MSME ecosystem. However, according to SMEStreet’s top-level sources, this fund of funds is under the pipeline of announcements. 

But in this budget analysis article, we have pointed out major highlights that will bring a smile of the faces of entrepreneurs from MSME and startups.

Here is the list of 7 Highlights Union Budget 2020 highlights that comes as a Good News for MSMEs:

1: Raising Turnover Threshold for Audit

There is no doubt that MSMEs have been facing a lot of pressure from the complexity of documentation work. Govt of India has taken a major priority on strengthening the factor of ease of doing business. Yesterday’s Union Budget 2020 has bought major relief to MSMEs, small retailers, traders and shopkeepers by announcing the proposal of raising the turnover threshold for audit from the existing ₹1 crore to ₹5 crores. This is a massive increase of five times.

Union Finance Minister Nirmala Sitharaman said that to boost the less cash economy, the increased limit would apply only to those businesses which carried out less than 5% of their transactions in cash.

Currently, businesses having a turnover of more than ₹1 crore are required to get their books of accounts audited by an accountant. However with this activity, MSMEs have to spent extra resources and time in getting this report from their CAs and accountants.

2: Customs Duty Hike on Imports 

Finance Minister Nirmala Sitharaman in order to ensure that the labour-intensive sectors, critical for employment generation, are not impacted by low-quality imports, has also proposed to increase customs duty on items like footwear and furniture. The rate of duty for footwear is being raised from 25% to 35%, and for “parts of footwear” from 15% to 20%. The rate for specified furniture goods is being raised from 20% to 25%. This move will certainly bring relief on MSMEs specially in the business of footwear manufacturing.

Manufacturing clusters such Agra and Kanpur in Uttar Pradesh and Sholapur, Kolhapur in Maharashtra, Faridabad in Haryana, Chennai leather cluster in Tamil Nadu, putting together, have over 50000 MSMEs involved in the footwear industry.

3: Invoice Financing Through TReDS

NBFCs will be allowed to extend invoice financing to MSMEs through TReDS and measures have been announced for debt recovery.

The government has also announced a ₹1,000 crore scheme to help mid-sized companies in export development, R&D and technology upgrade.

4) Scheme for Subordinate Debt for MSMEs

Acknowledging that working capital credit remains a major issue for the micro, small and medium enterprises (MSMEs) in the country, Finance Minister Nirmala Sitharaman has proposed in the budget to introduce the scheme to provide subordinate debt for MSMEs.

This subordinate debt, she said to be provided by banks would count as quasi-equity and would be fully guaranteed through the Credit Guarantee Trust for Medium and Small Entrepreneurs (CGTMSE).

5) The CGTMSE Push

The corpus of the CGTMSE would accordingly be augmented by the government, she proposed.

The MSME Ministry and Small Industries Development Bank of India (SIDBI) established the CGTMSE in 2000 to implement the Credit Guarantee Fund Scheme. The corpus of CGTMSE is contributed by the GoI and SIDBI in the ratio of 4:1 respectively.

Under the scheme, collateral-free credit (fund and non-fund-based) extended by eligible financial institutions to new and existing micro and small enterprises, up to a limit of Rs 200 lakh (Rs 2 crore), are eligible to be covered by the fund trust.

The Minister also highlighted that more than five lakh MSMEs have benefitted from restructuring of debt permitted by RBI in the last year. The restructuring window was to end on March 31, 2020. Government has asked RBI to consider extending this window till March 31, 2021.

6) Focus on Credit Access for MSMEs

Further, in order to streamline credit access for MSMEs, Finance Minister also highlighted an app-based invoice financing loans product will be launched. This will obviate the problem of delayed payments and consequential cash flows mismatches for the MSMEs.

7) Benefits for Startup Ecosystem

In order to give a boost to the startup ecosystem, the Union Budget has proposed to ease the burden of taxation on the employees by deferring the tax payment on ESOPs by five years or till they leave the company or when they sell their shares, whichever is earlier.

The Finance Minister said that Startups have emerged as engines of growth for Indian economy. During their initial years of business formation, Startups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise.

In order to extend this benefit to larger start-ups, the Budget has proposed to extend the turnover limit from the existing Rs 25 crores to Rs 100 crores. Moreover considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, the Budget proposes to extend the period of eligibility for a claim of deduction from the existing 7 years to 10 years.