MSME and Budget 2012

The small businesses of a country are an extremely important but ignored lot. Primary reasons for this is the low per unit turnover, high number of individual units and more importantly highly scattered nature of their existence. These reasons have always put the small business community on a weaker footing when lobbying for support from policy makers. This is one game where the big brother phenomena always win. Akin to this, in the budget proposed last week by the finance minister, one does find only a scattered and scanty reference to the MSME community. Here is a quick glance of the proposed clauses and some thoughts on what they may mean to MSMEs of the country.

 71. In order to enhance availability of equity to MSME sector, I propose to set up a 5,000 crore India Opportunities Venture Fund with SIDBI.

In an interesting move the finance minister has attempted to address one of the critical challenges of the MSME institutions namely capital. By setting up a large fund through one of the public sector financial institution, which is widely accessible across the country there is hope that a fair portion of these funds will also be accessible without much bureaucratic bottle-neck. One of the growing subset of the economy namely the services oriented businesses, normally find it more difficult than usual to gain access to capital. Hope this fund will enable solve this major challenge. This is important in the light of an economy that is growing with a heavy dependence on services. It must be remembered that a similar scheme by the name CGTMSE – launched earlier seemed exciting, but was difficult to leverage. Hope this scheme lives its intended purpose in the spirit rather than the letter.

 72. The Small and Medium Enterprises (SMEs) are the building blocks of our economy. They rely primarily on loans from banks and informal sources to raise capital. To enable these enterprises greater access to finance, two SME exchanges have been launched in Mumbai recently.

It is heartening to hear the finance minister re-iterate the fact about the importance of MSME to the economy. The creation of the exchanges specifically for MSME to gain access to the otherwise tough capital markets is definitely a step worth recognising. Though very early to opine on the success of such exchange, if the intent of the institution is held onto it might actually enable the move for a number of MSMEs who have immense potential in their business models for scale into high growth large enterprises.

73. With the objective of promoting market access of Micro and Small Enterprises, Government has approved a policy which requires Ministries and CPSEs to make a minimum of 20 per cent of their annual purchases from MSEs. Of this, 4 per cent will be earmarked for procurement from MSEs owned by SC/ ST entrepreneurs.

Again a well intentioned budget feature by the government over many years. However there is ample lack of clarity over how this should be implemented. Access to these contracts remains both difficult and incomprehensible, especially for an early stage institution. If some of the above orders or procurements are provided to worthy MSME units, it can boost not just their top-line and bottom-line but also the confidence in the entrepreneur/team. Failure to demonstrate success in this will only relegate this worthy step to just a well intentioned thought.

149. For SMEs, the turnover limit for compulsory tax audit of accounts as well as for presumptive taxation is proposed to be raised from `60 lakh to ` 1 crore.

This definitely reduces the amount of effort and costs that young companies spend on compliance related processes.

150. In order to augment funds for SMEs, I propose to exempt capital gains tax on sale of a residential property, if the sale consideration is used for subscription in equity of a manufacturing SME company for purchase of new plant and machinery.

This particular exemption could encourage enterprises to make investments for capacity expansion without hurting their profitability calculations. This could be extremely helpful for early stage entrepreneurs to attract people selling properties to invest in them. It helps the investor to reduce the tax burden without locking up money in another property, provides the entrepreneur with one more source of funds, and creates an alternate investment product for the investor.

155. Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value.

This seems to be read by many entrepreneurs as a controversial statement, ‘fondly’ referred to as ‘StartupTax! If one looks closely at the intent behind inclusion of this clause, it would become clear that from a macro-economic fund flow perspective, it is plugging off a possible hole for movement of unaccounted cash. Because of the subjective nature of the clause, implementation hassle on what would be the fair market value can create dissent on either side.  Especially, as a large investment in this category would go towards young firms (start-ups) who have very little other than great ideas and entrepreneurial spirits.  If the clause is implemented in its right spirit or intent, it will make the great debate around this subjective clause irrelevant. The verdict can only be provided in hindsight.

194. Our MSME sector is fertile ground for the production of low-cost medical devices. In order to provide impetus to this sector, I propose to reduce basic customs duty to 2.5 per cent with concessional CVD of 6 per cent on specified parts, components and raw materials for the manufacture of some disposables and instruments. Full exemption from basic customs duty and CVD is also being extended to specified raw materials for the manufacture of coronary stents and heart valves. These concessions would be subject to actual user condition.

With growing interest in Entrepreneurial activities especially in the medical field this clause could provide impetus to aspiring and existing entrepreneurs, to become competitive not just domestically but also in the global market. This reduction in the input costs can help MSME enterprises price their products competitively and if possible also enjoy larger profits. This could help them in reducing their cost of capital through reinvestments.

While the above are just proposals tabled by the finance minister, much remains to be seen in what form these actually get approved and the effectiveness with which they be implemented. Hence as with any policy a number of “Ifs” remain to be answered….

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