Spurring Growth

Spurring Growth

The Rs 7,200-crore tax-cut bonanza is likely to rev up the MSME sector reeling under the effect of demonetisation.

A day before the government was to present its Economic Survey Report for 2016/17, two prominent members of the Congress party - former Prime Minister Manmohan Singh and former Finance Minister P. Chidambaram - launched a scathing attack on the government's inability to pep up the economy. Among the numerous failures they pointed out, most worrying was the state of job creation. Quoting the Labour Bureau report, the Congress party said that the government has been able to create only 1.5 lakh jobs in 2016.

The government admitted in the report that job creation is India's central challenge. While it has been trying to spur growth in labour-intensive sectors such as textile and leather, it is the micro, small, and medium enterprises (MSMEs) sector that the government believes will be "instrumental in providing maximum employment to people".

As per the sixth economic census (2014/15), there were 58.5 million MSMEs which employed around 131 million people across the country. These units accounted for 38 per cent of the country's GDP and 40 per cent of the exports.

The Budget this year, therefore, spells good news for the MSME sector which has been the worst hit by demonetisation. The government's decision to reduce corporate tax rates for companies with an annual turnover of up to Rs50 crore from 30 per cent to 25 per cent has been the highlight. In his Budget speech, FM Arun Jaitley, said, "As per data of financial year 2015/16, 2.85 lakh companies making profit of less than Rs1 crore pay an effective tax rate of 30.26 per cent, while 298 companies making profit above Rs500 crore pay effective tax rate of 25.90 per cent," he said. The move is expected to benefit 96 per cent of the 6.94 lakh companies filing returns. This would lead to a total tax saving of Rs7,200 crore for these companies in 2017/18.

Relief has also been extended to micro enterprises with turnover of not more than Rs2 crore. The presumptive tax on these units would now be levied on only 6 per cent of the total turnover, from the existing 8 per cent.

Rahul Garg, Leader, Direct Tax, PwC India, says that the government did not have much headroom for across-the-board cut in corporate tax rate, and therefore, it zeroed in on the sector that can have maximum impact.

Sector specialists say that the move stands to improve the cash flow of the MSME sector, and encourage tax compliance, thereby formalising a large number of MSMEs. Sanjay Bhatia, MD, Hindustan Tin Works Ltd., and President, FICCI Confederation of MSMEs, says that if tax rates come down by 5 percentage points, many small enterprises in the informal sector would join the formal sector. A significant number of MSMEs are into manufacturing of textile, apparel, furniture, and auto components. Bhatia believes these proposals will help the sector in a big way in the long run.

However, some see a possible negative impact, too. P.K. Jain, Chairman, Assocham MSME Committee, says the move would "retard the growth of the MSME sector." He explains: "Once a company reaches Rs50 crore turnover, it would stop expanding, fearing a higher tax rate. It would then start a new company in the same compound to save tax." He urges the government to extend the reduced tax benefit to companies with annual turnover of up to Rs200 crore.

There are other smaller proposals in the Budget which would result in better funding and easier credit availability for the sector. One such proposal is asking SIDBI (Small Industries Development Bank of India) to refinance credit institutions that give unsecured loans to SMEs. A Budget report by rating agency ICRA states that this move would enhance fund flow to microfinance institutions and NBFCs, which in turn would improve the cash flow of MSMEs.

The Budget also has a proposal to increase the permissible provision for non-performing assets (NPA) from 7.5 per cent to 8.5 per cent. "This will encourage banks to accelerate lending to MSMEs since a surge in NPAs has been a crucial factor in their cautionary stance towards lending to these enterprises," says a CII press statement.

The government has also doubled the lending target under the Pradhan Mantri Mudra Yojana from Rs1.2 lakh crore to Rs2.4 lakh crore. Under this scheme, loans up to Rs10 lakh are disbursed to micro units.

According to government data, as against the target of Rs1.22 lakh crore in 2015/16, banks and MFIs together disbursed Rs1.33 lakh crore. Loans under Mudra are available both for new units, and expansion of existing units. In 2015/16, out of 3.49 crore accounts financed, 1.25 crore accounts, or 36 per cent, were for new entrepreneurs.

The Budget allocation for the sector has also been increased from Rs5,500 crore (revised estimate) in the current financial year, to Rs6,500 crore in 2017/18. The government's focus on building more skill development centres and improving labour laws also augur well for the MSME sector which has always faced a shortage of skilled labour.~