Spate of benefits announced for MSMEs in India

Why support MSMEs

The micro, small and medium enterprises sector in India just like the population, only second to China. In financial year 2019, the total number of MSMEs in the country was more than 63 million. The majority comprised of micro enterprises, with a higher number in rural areas than urban parts of the country. More often than not, these were run by the owners with little or no support and revenue earnings as a priority.

MSME significance

MSMEs are vital for the economy in terms of their contribution to the market and generation of employment in the country. The manufacturing output of MSMEs was close to 30 trillion Indian rupees during financial year 2015. The output from the enterprises also accounted for an almost 31 percent contribution to the GDP in the same financial year.

A glance at the enterprises

Between the two sectors, the dominant hand is laid by the service sector, which had an employment figure of approximately 50 million, whereas the manufacturing sector could only pull off half that number. Most of the employment comes from unregistered enterprises, with hesitations and avoidance of the difficult registration process quite evident. The saying “small things make the largest impact” holds true for MSMEs in India where small enterprises had a fixed asset value of over two trillion Indian rupees. With more infrastructural input and a simplified process of registration and receiving benefits from the government, MSMEs in the country are destined to go a long way.

In this backdrop, this sector was also most affected by the Covid crisis. And the Indian government indeed has risen to the occasion, and given a fillip to the MSME sector, not only by expanding their defintions and scope, but also financial help to MSME units.

What is the legal background for giving benefits to MSMEs:

MSME Act became operational on 2^nd October 2006. It was enacted to promote, facilitate and develop the competitiveness of the micro small and medium enterprises, rightly termed as “the engine of Economic Growth”. They are often recognized as pillars of economic growth in developing countries just like India. With adversities being faced in terms of infrastructutre, market linkage and competition from domestics as well as international markets, the sector has stood tall and also been instrumental in the growth of country’s GDP.

Udyog Aadhar:

It as an identification system, similar to Aadhaar, but specifically for businesses. Earlier, Udlog Aadhaar registration was an online method by which an MSME can get a 12 digit Udyog Aadhaar Number and then go for MSME registration. Therefore, one can say that both are different, but now Udyog Aadhaar registration is the new way of MSME registration.

Effective 1^st July, 2020, Udyog Aadhar has been replaced by registration on the Udyam portal, and allotment of the Udyam Registration Number. Application for the same in online, and there is no requirement to attach any documents. An e certificate is issued on successful registration.

Thresholds and limits for Micro, Small and Medium Enterprises:

Under the Aatmanirbhar Bharat Abhiyan (ABA), government revised the definition of MSME where they replaced the criteria of investment in plant and machinery to investments & turnover, where both are to be considered for deciding MSME. Further, exports will not be counted in turnover. Also, under the revised definition, the distinction between manufacturing and service sectors has been removed.

Classification	Micro	Small	Medium
Manufacturing & Service sector	Investments < 1 crore & Turnover	Investments < 10 crores & Turnover < 50 crores	Investments < 50 crores & Turnover < 250 crores

Calculation of Investment in Plant and Machinery:

• The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed under the Income Tax Act, 1961.

• In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.

• The expression “plant and machinery or equipment” of the enterprise, shall have the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).

• The purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, shall be taken into account excluding Goods and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one without any ITR.

• The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act shall be excluded from the calculation of the amount of investment in plant and machinery.

Calculation of Turnover:

• Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise whether micro, small or medium, for the purposes of classification.

• Information as regards turnover and exports turnover for an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.

• The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory.

Who can register

 

 

Under MSME definition, traders are not covered. But, there are two exceptions:

• A trader, who manufactures his product which is unique in some way and then trades, he can get himself registered under MSME
• A trader, who also provides services of the product he sells, can get registered under MSME as service provider.

Example:

 

Who is not Eligible:

Ministry of Micro,small and medium enterprises (MSME) has clarified via notifications that the following activities would be specifically not included in the manufacturing or production of commodities or rendering of services as per section 7 of the said Act.

• NIC code – 02 Forest and logging
• NIC code – 03 Fishing and aquaculture
• NIC code – 45 Wholesale, retail trade as well as repair of motor vehicle and motorcycles
• NIC code – 46 Wholesale trades except for motor vehicles as well as motorcycles
• NIC code – 47 Retail trade except for Motor vehicles as well as motorcycles
• NIC code – 97 Activitities of household as employees for domestic personnel
• NIC code – 98 undifferntiated goods / services – producing activities of private households

Re Registration of existing Enterprises: 

• All existing enterprises registered under EM–Part-II or UAM shall register again on the Udyam Registration portal on or after the 1st day of July, 2020.
• All enterprises registered till 30th June, 2020, shall be reclassified in accordance with this notification.
• The existing enterprises registered prior to 30th June, 2020, shall continue to be valid only for a period up to the 31st day of March, 2021.
• An enterprise registered with any other organization under the Ministry of Micro, Small and Medium Enterprises shall register itself under Udyam Registration.

Updation of Registration: 

• An enterprise having Udyam Registration Number shall update its information online in the Udyam Registration portal, including the details of the ITR and the GST Return for the previous financial year and such other additional information as may be required, on self-declaration basis. 

• Failure to update the relevant information within the period specified in the online Udyam Registration portal will render the enterprise liable for suspension of its status. 

• Based on the information furnished or gathered from Government’s sources including ITR or GST return, the classification of the enterprise will be updated. 

• In case of graduation (from a lower to a higher category) or reverse-graduation (sliding down to lower category) of an enterprise, a communication will be sent to the enterprise about the change in the status. 

• In case of an upward change in terms of investment in plant and machinery or equipment or turnover or both, and consequent reclassification, an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration. 

• In case of reverse-graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which such change took place.

Benefits of registration: 

MSME Loans

• A scheme for in principal approval for business loan up to INR 5 crores, available in 59 minutes, is already in existence. The initiative aims at automation of various processes to loan appraisal in such a way that an eligibility letter is issued. The rate of interest starts from 8% p.a. onwards. As the platform is directly connected to CGTMSE (Credit guarantee fund trust for MSMEs) scheme, collateral coverage is not mandatory. 

• Moreover under the recently announced Atmanirbhar Bharat Scheme, government has extended emergency line of credit for an amount up to 20% of the outstanding amount as on 29th February 2020 as collateral free. Borrowers with up to INR 25 crores outstanding and INR 100 crores turnovers are eligible. Also, this loan will have a 4 years tenor with a moratorium of 12 Months on principal repayment and no credit guarantee fees to be charged. There is 100% credit guarantee cover to banks and NBFCs on principal and interest. This scheme can be availed till 31st Oct 2020. 

• In normal scenario, if a borrower doesn’t pay the loan instalments within 90 days of being due, then banks classify such loans as non-performing asset (‘NPA’), but if an entity is registered under MSME, then the period for classification of loan as an NPA is 180 days. 

How MSME loans happen in 59 MINUTES? 

• Simple Online application process
• Documents required for loan procedure :
• Director/ Partner details : Basic, personal & ownership details
• GST identification number
• IT returns in XML format
• Bank statements for last six months in pdf format.
• Apply here : https://www.psbloansin59minutes.com/business-loan
• Banks who offer MSME loans: PNB, SBI, BOI, BOB, IDBI and other nationalised banks.
• Private Banks may not approve loans even after submitting the certification along with cover letter. In such scenario the entity can communicate with the bank manager or file grievance at https://www.rbi.org.in/Scripts/Complaints.aspx as the last resort. 

Equity Infusion 

Since Government has observed the inability of raising debt by MSME’s beyond a particular level, it recently announced INR 50,000 crores Equity Infusion for MSME’s through fund of funds. It means that the government will invest INR 10,000 crores to create FOF & the rest INR 40,000 crores will be put in by investors. This will help MSME in following ways: 

• Will help to expand MSME size as well as capacity;
• To improve the growth potential and viability; the new start-ups and young entrepreneurs will get benefitted from this corpus if they are registered under MSME units;
• FOF will operate through a Mother Fund & few Daughter Fund; (Fund of Fund that works with venture capitalists to create funds is known as daughter fund & the government’s contribution is the mother fund)
• The Fund structure will help leverage Rs 50,000 crores of funds at daughter funds level.
• Will encourage MSMEs to get listed on main board of stock exchanges. 

The Fund of Funds is managed by SIDBI, which invests the money into Alternate Investment Funds, which in turn invest in start-ups* 

*Note: Until now, the government has not officially released any details on how the proposed MSME Fund of Funds will be run or what kinds of companies it would invest in. 

Reduced interest on loans:

All the type of loans cash credit/ overdraft/ term loans etc. shall be eligible for interest subvention for 2% – 3% from Government of India. Hence it is beneficial for entities to get registered under MSME Act. 

Guarantee free lending 

To meet liquidity requirements for few companies, under Atmanirbhar Bharat, the Government of India would facilitate the provision of Rs 20,000 crores Subordinate Debt for functioning MSMEs which are delayed on repayment of loans or have made their loans as NPA. It would also be fully guaranteed via the Credit Guarantee Trust for the Medium and Small Entrepreneurs (CGTMSE). 

MSMEs being a group of small and medium size units require more liquid funds than large corporates for their business expansion, but banks and NBFCs due to doubtful mind and to play safe are often unwilling to extend the line of credit for these units. Knowing the fact that subordinate loans carries a higher rate of interest, they are listed as a long-term liability on the company books and thus help the MSME units with more liquid capital to invest in their growth and expansion in the present scenario. In case of any defaults, the entrepreneur is required to first clear the unsubordinated loans before the subordinate debt. 

Exemption from Global Tendering 

Apart from liquidity enhancement measures, recently in COVID-19 relief measures government had announced economic support package for MSME where the government has taken a step towards increasing the market for MSME in India. 

Moreover, Indian MSMEs and other companies have often faced challenges and unfair competition from foreign companies. Therefore, Global tenders will be disallowed in Government procurement tenders up to rupees 200 crores. 

The government has notified amendments to General Financial Rules (GFR) to ensure that goods and services valued less than INR 200 crore are being procured from domestic firms, a move which will benefit MSMEs. 

Protection against delayed payment 

Companies have been mandated to release all payments to a MSME Enterprise outstanding for more than 45 days immediately. 

Hence forth delayed payments can be enforced on MSME Samadhaan platform through the MSME Facilitation Council and the entity can recover the delayed payments along with three times bank interest of SBI. Note that period of credit is by default prescribed as 45 days maximum if not specified. Lower credit period can be as agreed upon between the buyers and sellers. 

Also as per Section 19 of the MSMED Act, 2006, no court will entertain the decree or order given by the MSME Council for recovery of dues unless the buyer has deposited 75% of the disputed amount with the court and court shall give a portion of this amount to MSME units. Before proceeding with legal case, the MSME unit must write to the auditors of the buyers informing about the outstanding claims and also specify the outstanding amount along with interest to be mentioned in the annual statement of accounts as per the Companies Act, 2013. 

Relaxation from Tax audit

In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, the turnover threshold for audit has been raised from the existing Rs. 1 crore to Rs. 5 crore. The increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash. 

Discounting of receivables

In order to enhance economic and financial sustainability of MSMEs, amendments have been proposed to the Factor Regulation Act 2011. The amendment will enable NBFCs to extend invoice financing to MSMEs through Trade Receivable Discounting systems or TReDS. The objective of TReDS, launched by the Reserve Bank of India in December 2016, is to facilitate financing of invoices / bills of MSMEs drawn on corporate and other buyers, including the Government Departments and PSUs, by way of discounting by financiers. 

Other Benefits 

There are total 9 schemes active for MSME sector. For detail access one can visit: https://msme.gov.in/all-schemes 

• Reimbursement of expenses up to 75% or Rs. 75,000 incurred for obtaining ISO Certificate
• Reimbursements for 75% of the trade fairs or exhibition cost for three times in a year and once in an international exhibitions.
• Reduction of 50% government fees for patent and trademark application using MSME / SSI / Udyog Aadhaar Registration Certificate.
• MSME symbol is like a status symbol for an entity
• Subsidy on NSIC Performance and Credit ratings
• Reservation policies to manufacturing / production sector
• Very easy to get Licenses, approvals and registrations
• Waiver of Stamp Duty and Registration Fees for land in backward area
• Eligible for INDIAN PROMOTION SUBSIDY
• Concession in electricity bills for land in backward areas.
• Enterprises that have MSME registration can enjoy Direct Tax Exemption in the initial year of business, as mention in the scheme by Government and depending on business activity.
• It can take credit for minimum alternate tax (MAT) to be carry forward for up to 15 years instead of 10 years . Reimbursement of expenses up to 75% or Rs. 75,000 incurred for obtaining ISO Certificate
• Reimbursements for 75% of the trade fairs or exhibition cost for three times in a year and once in an international exhibitions.
• Reduction of 50% government fees for patent and trademark application using MSME / SSI / Udyog Aadhaar Registration Certificate.
• MSME symbol is like a status symbol for an entity
• Subsidy on NSIC Performance and Credit ratings
• Reservation policies to manufacturing / production sector
• Very easy to get Licenses, approvals and registrations
• Waiver of Stamp Duty and Registration Fees for land in backward area
• Eligible for INDIAN PROMOTION SUBSIDY
• Concession in electricity bills for land in backward areas.
• Enterprises that have MSME registration can enjoy Direct Tax Exemption in the initial year of business, as mention in the scheme by Government and depending on business activity.
• It can take credit for minimum alternate tax (MAT) to be carry forward for up to 15 years instead of 10 years

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Contributing Advisors