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– Mr. Srinivasan V and Sudhakar

This is perhaps the most awaited Finance Budget in almost two decades. This incidentally also is the first budget of this current decade. While every budget has an economic/financial history/reason behind it, this one is unique as the pandemic was unprecedented and none of the global economies have handled this in the past. With vaccination in progress, India has already started witnessing fastest growth and recovery in many sectors. Consensus seems to be that our growth will be in excess of 10% for FY 21-22.  The indicators are also in the right direction – with the number of company registrations, recruitment of fresh graduates, engineers, etc.  We have also witnessed a record GST collection in December at Rs. 1.2 Lac Crs.

In the midst of several indicators showing favorable indicators, we have witnessed a path breaking budget. The budget has kept its focus on Government spending and in particular focus on big impact capital expenditure projects and spending on healthcare. The buoyant tax revenues augmented further with disinvestment and monetization of Government assets are helping the Government to keep the fiscal deficit within manageable limits.

SME’s form an important element in the Indian economy. Some of the policies and tax proposals will significantly benefit the SME sector, which are as below:

MSME budget allocation

The Government has made a higher budget allocation of Rs. 15,700 Cr which essentially spent on guarantee for the Covid Emergency Credit Line.

Access to NEW Capital: SRI (Self Reliant India) Fund:

This is the first time the Government itself is setting up a Venture Capital fund to invest in MSME sector for growth capital. The Mother fund with Rs. 10,000 crores has already been set up to be administered by NSIC. The process of setting up daughter funds and further augment the corpus to Rs. 50,000 Crores is under process and the budget has promised to speed up this process and deploy funds in FY21-22. India never had such a facility in the past and is a great way for MSMEs to augment the equity capital side of their Balance sheet thus enabling themselves to better leverage and borrow as well as have a larger risk buffer.

Manufacturing Focus:

The Government is keen to make manufacturing a thriving activity in India. There is a massive shift of manufacturing activity to India and the MSME entrepreneurs should explore this opportunity and set up units to manufacture key items consumed by Indians in electronic, textiles and electric vehicles etc. The Budget has promised close to Rs. 2 Lac Cr of Production Linked Incentives (PLI) over the next 5 years for 13 Key Sectors and also promise to set up fully integrated, export oriented mega textile parks. It also hiked customs duty on few components like Screws etc. so that Indian MSMEs which already manufacture them in large portion get price benefit.

Startups:

The encouragement and thrust for startups only continue year on year and has been a major focus area for the government. A plethora of incentives for set up and operations like funding, tax, IP protection, etc. continue to be given to the startups. The tax incentives which are contingent upon the startups being registered on or before March 31, 2021 are now extended up to March 31, 2022.

Company Matters:

• The definition of small companies has increased from the current Rs. 50 lakhs to Rs. 2 Cr and the turnover limit from the current Rs. 2 Cr to Rs. 20 Cr. This will significantly ease the compliance for many companies in the SME space. 

• One Person Company (OPC) will be allowed to grow without any restrictions either on the paid up capital or the turnover, and allowing them to be converted into any other corporate vehicle at any point of time.

• To ensure faster resolution of cases, National Company Law Tribunal (NCLT) framework would be strengthened, e-Courts system would be implemented and alternate methods of debt resolution and special framework for MSME to be introduced.

• LLP Act to be de-criminalized.  The proceedings under the LLP Act will not be considered as criminal in nature. 

 Tax Proposals:

• There have been no changes to the income tax rates, deductions, exemptions in the Budget 2021.  The Indian tax rates have been one of the lowest in the world, with rates as low as 15%. The Indian companies, including SME’s continue to enjoy this benefit.

• The threshold of conducting tax audits for companies, have been increased from Rs. 5 Cr to Rs. 10 Cr, if the cash transactions does not exceed 5% of such receipts and payments in total.

• Constitution of Dispute Resolution Committee for small and medium tax payers to be established for quicker disposal of tax disputes, thereby reducing long pending tax litigations.

• The thrust on faceless assessment continues, with the introduction of faceless proceedings before the income tax appellate tribunal. Further, the income tax settlement commission has been discontinued, thereby bringing in speedier disposal of tax issues.

• In a significant move, the tax authorities right to re-open past cases have been reduced from the current period of 6 years to 3 years. Further, re-opening beyond a period of 3 years will only be permitted with the approval of the Chief Commissioner of income tax.

•  Employers to ensure that the tax the employee contribution of provident fund to be deposited within the prescribed due dates.

• Tax planning through partnerships to be structured with care, as it may lead to adverse tax consequences.

• “Goodwill” which was considered as a business asset and depreciation claimed thereon will now not be considered as an asset and consequently denied depreciation.  This has come has a shocker as the amendment has taken place after the ruling of the Supreme Court in the case of Smifs Securities. The question that remains debatable is whether this benefit is retrospective or prospective and we await clarifications from the government.

• Tax Deducted at Source (TDS) has been prescribed on purchase of goods at 0.1%, exceeding Rs. 50 lakhs.  The responsibility for this deduction shall apply to assesses which turnover exceeds Rs. 10 crores.  Further, higher rate of TDS/TCS are prescribed for non-filers of income tax returns.

• A new initiative called ‘Turant Customs’ will be introduced for faceless, paperless, and contactless customs measures

Atma Nirbhar Bharat Abhiyan has been the touchstone for the Budget and a number of measures have been taken to given an impetus to the economy and the SME sector.

About The Author
Credits: Mr. Srinivasan V and Sudhakar, Partners, CFO Bridge