During the last 2 to 3 years, the sector which took the maximum brunt of the slowdown was the MSME sector. There was a lot of expectations built from budget, to support MSME’s who have the best bet for an increase in employment rate.
The budget has not disappointed from this point and the proposals will have a positive impact on the sector. Below is the discussion on how individual changes support the sector:
Changes in individual tax rate with NO exemption option
One of the biggest structural change has come in Individual tax rate, wherein a concept of tax on income without exemptions is introduced. A lot of noise on the proposal may be true from the employees’ point of view, but for self-employed and partners in partnership firms, it can be beneficial in certain scenarios. Per my experience, businessmen normally don’t invest too much into tax-saving investments and prefer keeping invested in their business (We will not discuss on prudency of it). In cases wherein both husband and wife are partners, the total limits of INR 3 lac for tax savings may be high and may not get exhausted. The update will reduce overall tax liability and will give more cash for individuals to spend or invest as per his choice. This will also promote compliances as businesses will have to pay lower tax even on higher profits
Lower compliance burden for entities have turnover less than 5 crores
At present entity having a turnover above 1 crore is required to get their accounts audited under Income Tax, which will now change to 5 crores provided cash turnover is less than 5%. A businessman is already seeking professional support and getting its accounts audited under GST and by increasing this threshold he will be able to reduce its compliance, duplication of audit and associated costs. In past, high compliance cost was one of the key reasons for businesses not scaling up. With 5% cash threshold, Government is pushing digital payments and will now have a ready database for entities having higher cash components they can track and do data analysis.
This can negatively hit professional fees of Chartered Accountants and professionals, who will now need to upgrade themselves and become a value-added partner than being just a certification agency
Dividend taxable at individual tax rates
With the choice open for individuals to invest surplus funds not restricted by tax incentive, equity investments will become more attractive especially for lower-income earners as now their dividend can be taxed as per his slab instead of earlier flat rate of approx.. 20%+.
By selecting Growth options instead of Dividend, the tax liability can be further reduced or deferred giving an additional push towards equity savings. The government disinvestment target is upwards of 2 lac crores and they are channelizing small saving towards equity-oriented schemes which is a long term plus for any economy
Customs Duty increase giving a much-needed cushion for competing with cheaper imports
The biggest fight for a small scale manufacturer is to compete with cheap imports and this increase in duty will give them a level playing field. Duty support coupled with a reduction in compliance burden, digital invoicing and bill discounting facility will go a long way in making MSME’s competitive. Better and bigger balance sheets also support’s arranging cheaper credit
A National Logistics Policy will be released soon and it will clarify the roles of the Union Government, State Governments and key regulators. It will create a single window e-logistics market and focus on generation of employment, skills and making MSMEs competitive.
Invoice factoring
The Government will make necessary amendments to the Factor Regulation Act 2011. This will enable NBFCs to extend invoice financing to the MSMEs through TReDS, thereby enhancing their economic and financial sustainability.
Making returns and compliance simpler both from Income tax and GST standpoint, automating or prepopulating data for returns, coupled with lower taxes is bridging the gap between non-compliant and compliant entities giving a huge flip towards formalization of economy
