Small Medium Business Growth Company| aaconsulting

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Executive Summary

The Micro, Small and Medium Enterprises (MSMEs) sector in India have done well in a buoyant economy. India is poised to emerge as one of the leading economies of the world and it is projected to be the second largest by 2050. The MSME sector is considered the backbone of Indian economy with a contribution of 38% to India’s GDP, 40% share of exports and 37% share of the manufacturing output, apart from it employing almost 120 million across the country. It is well understood that the MSME will play a crucial role in furthering growth, innovation and commerce in India. A major thrust, consequently, is the need of the hour to strengthen it and make it well-equipped to steer the country towards growth.

2017 saw developments in the country and outside that would have a major significance in the trajectory of MSME growth. The launch of the Goods & Services Tax was a major game changer and is expected to benefit MSMEs not only with simpler tax structure, but also with aspects such as improved technology adoption, in order to comply with GST system. Secondly, the government has also announced major sops to address the credit paucity for MSMEs by doubling their credit guarantee cover from Rs. 1 crore to Rs. 2 crore and enhancing their cash credit limit from 20% to 25%. Further, the government’s focus on digitalization of business processes and regulations through self-attestations and certifications, single window clearance, online approvals, etc., will further strengthen the MSME sector. Another significant move is the Zero Effect Zero Defect Scheme launched by the Prime Minister, Mr. Narendra Modi, to promote manufacturing excellence amongst MSMEs while minimizing the adverse effect on the environment.

Other major developments comprises of the launch of the National SC/ST Hub for building the capacity and enhancing the market linkages of the underprivileged sections of society, the Insolvency and Bankruptcy Code, and labour market reforms. The Ministry has also launched the MSME Databank in order to create an online repository of MSMEs in India and their various products and services. Moreover, the initiatives undertaken by CII have been able to affect a tangible change in the MSME ecosystem in the country. CII is aimed at working synergistically with the government and actively champion the cause of a robust MSME sector in India through its ongoing and upcoming initiatives. A technologically vibrant and internationally competitive SME sector is what the sector will strive to achieve, thus sustaining its contribution to the national income, employment and exports.

Micro, Small & Medium Enterprises (MSMEs) Play a Vital Role In The Growth Of Indian's Economy. MSMEs are the very fuel That Will Drive The Growth Engine Of The Indian Economy.

The year 2017 was crucial in many ways for the country’s economy. Optimistic outlook towards the business environment has seen more participation from businesses. This has been validated by the government’s definitive push to bring manufacturing services and output to the forefront. The role of Micro, Small and Medium Enterprises (MSMEs) is central to this development. Let us look at the key initiatives that are poised to drive development in the MSME space.

2017: A Better Year to Set-Up MSME Business

The nation as a whole is on a massive drive to become cashless and the government is trying to promote cashless transactions as a weapon against corruption. Though it is yet to be decided whether this drive would be completely successful, a cashless economy holds a lot of hope for the MSME segment. Let us look into how cashless transactions will help in MSME business. For one, going cashless will help entrepreneurs keep their monetary dealings transparent and thereby help them to get low interest business loans. It would also help small businesses to avail loans easily. The load of paperwork to get a bank loan has diminished and it is a matter of days to get loans sanctioned, thanks to NBFCs. Moreover, with the introduction of several pro- MSME government policies, business finance has become even easier this year. Several non-banking organizations are also collaborating with banks or financial organizations to extend help to the small or medium business ventures. SMEs can also procure hassle free funds from online lending companies to build their business.

Another marked change visible in 2017 is that the competiveness of the manufacturing industry is increasing rapidly and it is amply visible in the big Indian cities like Pune, Kochi, Chennai, Delhi-NCR, Kolkata, Mumbai, Chandigarh, Bengaluru, Hyderabad, and Ahmadabad. The service tax structure of the country has also been reviewed and the new structure is also shaped in favour of SMEs.

SMEs pertaining to electronic goods, building materials or automobile parts will largely benefit as the central excise duty has been reduced significantly. Taxation on purchase as well as advertising will be lowered in the days to come. 2017 is projected as a year that will make it possible for SME owners to enjoy skilled workers, better energy usage and cost competitiveness, thereby enhancing the success ratio in their business.

SME Trends in 2017

With the Indian economy expected to emerge as one of the leading economies in the world, a great impetus is being laid on the growth and development of the SME sector in India. Here are some of the major trends that were dominant in the year 2017 in this sector:

Advancement in Technology

The advent of advanced technology has given rise to newer channels for businesses across several sectors, especially in the B2B e-commerce. With the help of technology, it has become possible to cover even kirana shops under ecommerce. Technology has facilitated easier transactions, sourcing of raw materials and industrial goods and connecting reputed brands with small players in the market. The B2B ecommerce is poised to gain momentum in 2018 with the MSME sector expected to become a Rs 1,64,000-crore market for innovative technology by 2020.

Amalgamation of E-commerce and M-commerce

Given the ubiquitous nature of the internet in recent times, digital transformation in the Indian SME sector is no longer a distant future. This, along with the fact that smartphones are becoming increasingly accessible and affordable, is making SMEs simultaneously adapt to web as well as mobile-based technology. An EY report states that companies have shifted their focus on mobility against social resulting in a change from Social-Mobility Analytics & Cloud (S-M-A-C) to Mobility-Analytics-Cloud & Social (M-A-C-S). M-A-C-S technologies are being readily adopted by second generation entrepreneurs to bring operational efficiency. This leads to transformation in the customer experience and an increase in revenue. Considering everything, Indian SME sector is geared up to benefit the union of ecommerce and m-commerce in 2017.

Improvement in SME Lending

One of the constraints in the growth of the SME sector is the non availability of easy finance. Small and medium enterprises have a tough time working with traditional banks because of lack of experience, no collaterals and infrastructure, poor financials, and small ticket size. Fintech players, thanks to their significant online presence, are now making it easier for the SMEs to buy loans. 2017 has seen an increase in NBFCs, with special focus on customized loan solutions on online platforms. Such alternative lending companies are using technology like analytics and other scanning metrics to check the credit-worthiness of the sellers and disburse loans within 48 hours. Several mainstream banks like Bank of Baroda are entering into partnerships with new-age Fintechs to widen their reach in the SME sector.

Government Initiatives

The MSME sector is expected to contribute significantly to India's growing GDP. It is projected that this sector will improve India’s financial inclusion and lessen the urban-rural divide. Again, it is expected that by 2020, India will have the largest job ready, youth population in the world and this sector will not only generate employment of significant level but will also become the hotbed of entrepreneurial activities. The government realizes the urgency for providing a congenial atmosphere to foster the growth of Indian MSME and 2017 witnessed the strengthening of current policies and introduction of new initiatives to improve the business environment for MSMEs. Secondly, the implementation of the much-awaited GST Bill has benefitted MSMEs not only with simpler tax structure, but also with improved technology adoption in order to comply with GST system. With the “one Nation, One tax” approach, Indian is poised to be an open market helping SMEs explore new markets with few entry barriers for business expansion. The GST bill is set to revolutionize the Indian tax system and offer the SME sector an equal footing as compared to their bigger, more-established counterparts.

New heights for SMEs – IPO in 2017

BSE and NSE launched SME platforms in March 2012, becoming the only two bourses to offer such a segment in the country. Since then, around 329 companies have got listed on these platforms.

Spurred by investor interest, 132 SMEs raised a record Rs 1,785 crore through IPOs in 2017, which was more than three times the funds raised in the preceding year.

Besides, 2017 witnessed more fund-raising than aggregate capital garnered in past five years cumulatively. Overall, the firms had mopped up Rs 1,315 crore in last five years. Together, these 132 firms have a market capitalization of more than Rs 30,000 crore.

New heights for SMEs – IPO in 2017

Geographically, Gujarat continued to dominate the IPO space by contributing 51 firms on SME bourses, followed by Maharashtra (39), Madhya Pradesh (11), Delhi (8), Rajasthan (6), Telangana (4), West Bengal (3), and two companies each got listed from Andhra Pradesh and Punjab.

To conclude, 2017 has been a year of progressive changes in the Indian SME sector based on the above-mentioned trends. Several policy interventions along with technology and innovation continue to play a pivotal role in creating a business-friendly atmosphere for the SMEs.

Union Budget 2017 for MSMEs

Listed below are some of the major highlights of the Union Budget 2017 for MSMEs::

Reduction of corporate tax from 30% to 25% for smaller companies with a turnover of up to Rs. 50 crores. This respite will make a difference in the revenue chains of the MSMEs. The firms will be encouraged to shift from proprietorship registrations to private limited /LLP registered firms, thereby creating a more favourable working environment for MSME players. More than 96% of the companies are going to benefit from lower taxation.
To promote digital means of doing business, it is declared that businesses that have turnover up to Rs.2 crore. Under section 44 AD of the Income tax Act, income would be presumed to be 6% of the total turnover of the assessees, instead of 8%, only if gross receipts are received through digital means. This tax reduction from 8% to 6% will lead to less cash and more transparency in the MSME sector apart from helping in broadcasting the tax base.
Lastly, the profit linked deduction exemption available to start-ups for 3 years out of 5 years is changed to 3 years out of 7 years. Again, to assist carrying forward of losses in start-ups, the condition of continuous holding of 51% of voting rights has been relaxed, subject to the condition that the holding of the original promoter/promoters continue.

Proposed Key Initiatives for MSMEs (Industry-wise):

In order to create employment in leather and footwear industries, a special scheme is proposed on the lines of the scheme in textile and apparel sector.

There is a proposal to create a dairy processing infrastructure fund with a corpus of Rs. 2000-crore. This step will benefit the cattle industry to boost rural economy.

The Foreign Investment Promotion Board (FIPB) will be abolished in 2017-18 as part of the liberalization of FDI policy. This will result in all sectors coming under the automatic route as opposed to approval route.

The period of MAT credit is extended to a period of 15 years instead of the existing period of 10 years.

In order to promote India as a global hub for electronics manufacturing, a provision of Rs. 745 crore has been earmarked in 2017-18 to facilitate schemes like Modified-Special Incentive Package Scheme (M-SIPS) and Electronic Development Fund (EDF). The allocation has been increased in the wake of an exponential increase in the number of investment proposals.

Further, in several products in the chemicals & petrochemicals, textiles, metals, renewable energy sectors, the inverted duty has been rectified. Change in duty to improve domestic manufacturing of medical devices for digital transaction and capital goods have also been announced.

Infrastructure, one of the key pillars in the Make in India programme is also invested with a huge budgetary allocation. In 2017-18, the total allocation for infrastructure development stands at Rs. 3,96,135 crores. A proposal to draw up a specific program for development of multi-modal logistics parks, together with multi modal transport facilities has been drawn up and is to be implemented soon.

Another big player in employment generation and a major contributor to the Indian economy is tourism, and several big projects like Incredible India 2.0 is proposed to be launched at the earliest. Five Special Tourism Zones, anchored on SPVs in partnership with the States are in the pipeline to promote Indian Tourism and employment.

In terms of modernization and upgrading of identified corridor, the government has plans for laying railway lines of 3500 kms. Secondly, a total of 25 stations are listed for redevelopment and 500 stations will be made differently-abled friendly with provision of lifts and escalators during 2017-18.

For the Make in India sectors to thrive initiatives in Skill Development is essential. To facilitate the same, SANKALP scheme to provide market relevant training to 3.5 crore youth and STRIVE scheme to improve the quality and market relevance of vocational training are launched.

Trade Infrastructure for Export Scheme, a restructured Central scheme will be launched in 2017-18 with a focus on export infrastructure, namely, TIES.

In order to boost the domestic LED companies, there is a reduction in Basic Customs Duty (BCD) from 10% to 5% for all parts used to manufacture LED luminaries, drivers, etc. On importing of semi-finished inputs for LEDs, a BCD of 5% is levied. This will make the LED products of those manufacturers who assemble LEDs in India cheaper as compared to those who are importing semi-finished products. Excise duty on LED parts is also reduced to promote domestic manufacturing.

Proposed Key Initiatives for MSMEs (Industry-wise):

The GST Bill, which was the most awaited reform in 2017, is expected to benefit MSMEs with simpler tax structure as well as with other aspects such as improved technology adoption to comply with GST system. An in-depth study into the impact of GST on MSME brings into perspective the following features:

Negative Impact of GST

While tax neutrality is a factor welcomed by MSMEs, reduction in duty threshold has become an area of major concern. The GST bill proposes a reduction in threshold to Rs 9 lakh as compared to the threshold of the central excise law of Rs.1.5 crore. (However, GST council has increased the threshold limit from 10 lakh to 20 lakh and from 4 lakh to 10 lakh for North eastern states). The present GST reform demands that any service provider or retailer will be subjected to levy of service tax. The present central excise law is Rs. 1.5 crore. This reduction in threshold will significantly affect the MSMEs’ working capital. For example, a trader today who does business of Rs. 50 lakh today without any tax imposition will be expected to pay GST after implementation. At present, with a low threshold, most MSMEs are exempted, but in the future, they are expected to pay a big chunk of their capital towards tax. With GST implementation, there is no tax differentiation between luxury and normal goods. In the past, the state and the central governments were levying higher taxes on luxury items. Under GST, all goods and services come under same tax bracket leading to rich becoming richer and poor becoming poorer. This is not a level playing ground with MSMEs competing against large businesses. Thirdly, under selective tax levying, GST is not applicable to alcoholic liquor for human consumption and petroleum-based businesses. This creates a gap and goes against the “unified market” ideology of GST. In the past, Service Tax rate was 15% while GST rate will be around 18%. Further, Centralised Registration has been discontinued and each unit in different states will have to obtain separate registration. Therefore, even if services are supplied by a company's unit in one state to another unit in another state, the taxes will still be applicable. Another negative impact that GST Implementation is that the taxation of stock transfer will affect working capital requirements. The amount of impact will differ depending on stock turnaround time at warehouse, credit cycle to customer, quantum of stock transfer, etc. Higher amount of Capital Requirement will increase the cost of interest which will ultimately increase the price of Finished Goods.

Positive Impact of GST

On the positive side, GST has made it easier to start a new business. Previously, the Sales Tax department had various turnover slabs which required VAT registration. In this case, a business with multi-state operations had to comply with all tax rules applicable to different states. This not only created complications, but also burdened the MSMEs with additional procedural fees. Now, with uniform GST, the process will be standardized. GST will also pay a significant role in MSME market expansion. Before GST, big corporations procured goods based on the locality of MSMEs to reduce overheads. Consequently, they preferred to limit the customers within the state to save on the burden of tax and as a result lost out on this customer base. In the present scenario, this will be nullified and the tax credit will get transferred. This has made it possible for MSMEs to expand across borders. Another benefit of GST lies in the fact that it is tax neutral and therefore it eliminates border tax procedures and toll check posts. This will promote supply of goods across borders and reduce the logistics cost for manufacturing bulk goods. This will be a breather for all small MSMEs.

GST does not differentiate between sales and service. As a result, companies that follow both sales and service model of business will have a simplified taxation plan and will be calculated on total. GST has made it possible that the entire amount of input tax can be credited in the year of purchase in the purchase of capital goods. Previously, only 50% of the amount was available in the year of purchase and the balance in subsequent years. This policy is a firm step towards the "Make in India" campaign.

Various Schemes and Initiatives for SMEs in 2017

Digital MSME scheme for Promotion of Information & Communication Technology (ICT) IN MSME Sector

Objectives

Sensitize and encourage MSMEs towards new approach i.e Cloud Computing for ICT adoption.
Adoption of best practices to improve quality of products and services
To benefit large number of MSMEs
Standardization of their business processes
Improvement in delivery time
Reduction in inventory cost
Improvement in productivity & quality of production through cloud computing.

Current initiatives – Ease of doing business

In this context, various initiatives to improve the competitiveness and ease of doing business have been proposed such as

Stress on cluster development.
Development of Electronic Manufacturing Clusters.
Improving the business regulatory framework in India.
Boosting India’s manufacturing exports.
Revisit labour laws giving higher flexibility and greater employment opportunities.
Implement GST at the earliest to boost GDP.
Revise the definition of MSMEs with enhanced capital investment limit.
Enhancing skill levels of current workforce to improve productivity.
Encourage young entrepreneurs & revamping of skill development & capacity building programmes.
Technology upgradation & support for emerging sectors.

Conclusion

In conclusion, 2017 has been a remarkable year in the Indian MSME sector. The Goods and Service Tax was a major milestone in the economic map of India and is expected to assist MSMEs with a simpler tax structure, apart from other fringe benefits. Further, with government’s focus on digitalization, advent of improved technology, single window clearance, online approvals, etc. will help to speed up the erstwhile lengthy business processes and regulations. Moreover, the various benefits and SOPs in the Union Budget for the MSME sector will further help the Indian MSMEs take a smoother course towards development. The MSME sector is well-equipped to fulfill its role as the backbone of Indian economy and is poised to make “Make in India” campaign a reality in the near future.