Budget 2023 and its impact on MSMEs

Friday, 3 February 2023

Synopsis: The Indian government has announced several new measures for giving a leg up to MSMEs in the latest 2023 budget. Below, we highlight the main budget provisions and their impact on MSMEs.

Reiterating FM Nirmala Sitharaman’s budget speech, MSMEs are the “growth engines of the economy.” Totaling over 6.3 million units, employing close to 11.1 crore people, and accounting for 30% of GDP, MSMEs truly function as the backbone of the economy.

But with the onset of pandemic the MSME sector took a significant hit—and continues to reel under its aftereffects. Over the last two budgets, the Indian government has introduced several provisions to aid MSMEs in recovery, while building resilience.

The 2023 Budget, in addition to introducing new provisions, builds on some of the measures already presented in the previous budget installments. We enumerate them below, along with how they will boost MSMEs further.

Small Budget Steps, Giant MSME Prosperity Leaps

With the economy finally coming back on track, many enterprises in the MSME sector have managed to recover their sales to 90% of pre-pandemic levels. But more needs to be done, especially when viewed against the context of the pivotal role of MSMEs in pushing exports and fueling economic growth—something that the 2023 budget also focuses on.

#1 Revamped Credit Guarantee

As per the Economic Survey 2022-23, MSME credit offtake has risen tremendously, in part due to the Emergency Credit Linked Guarantee Scheme (ECLGS) that was introduced in 2020 over pandemic concerns. Indeed, ECLGS backs 1.2 crore businesses, with 95% of them being MSMEs.

Budget 2023 has further strengthened ECLGS by funneling in another Rs. 9,000 crores into the scheme. As a result, MSMEs will now be able to enjoy another Rs. 2 lakh crores worth of collateral-free loans. Furthermore, the credit costs are expected to fall by another 1%. This will bode well for enhancing credit penetration in the funds-deprived MSME sector and emboldening entrepreneurship.

#2 Vivad Se Vishwas 

Another 2023 budget provision, which aims to provide relief to MSMEs struggling due to economic disruptions, is the Vivad Se Vishwas 1 scheme. Here, MSMEs that had failed to complete contracts during COVID-19 will be granted 95% of the forfeited bid amount or the performance security by the government and its other undertakings.

#3 Presumptive Taxation

Pre-2023 budget, micro-enterprises with a yearly turnover of up to Rs 2 crores could file taxes under the presumptive taxation method. This limit has now been enhanced to Rs. 3 crores, subject to the provision that cash receipts do not exceed 5%. As a result, the requirements for the maintenance of accounts and conducting statutory audits have been discounted for several other small enterprises. 

Furthermore, the budget 2023 has stated that the expenditures will be recognized as they occur. This will further improve compliance and reduce the cost and time involved in filing tax returns, and may even spur MSMEs towards formalization.

#4 Payment Delays

According to GAME-D&B’s report, the outstanding payables to MSMEs are approximately over Rs. 10.7 lakh crores, which adversely impacts their cash flows and debt repayments. 

Consequently, the government has proposed that deductions for expenditures incurred on making payments to MSMEs can only be availed after the payment has been made. This will go a long way in ensuring that MSMEs are paid on time, thus improving their financial health and competitiveness.  

#5 Ease of Business

The Budget 2023 has introduced various measures to augment MSMEs’ business environment. 

  • To improve the ease of doing business, about 39,000 compliances and 3,400 legal provisions have been reduced and decriminalized.
  • The PAN card has been made the common identifier for all digital transactions at government agencies to simplify the KYC process and reduce the compliance burden.
  • A ‘National Data Governance Policy’ will also be introduced to reduce privacy breaches. It aims to improve the access, quality, usage, and management of data for empowering inclusive development. 

#6 Entity DigiLocker

While making additional changes to DigiLocker, the government has further set up an Entity DigiLocker for MSMEs. It will enable small businesses to easily, safely, and securely store their documents online. These documents can, then, be shared with lenders, regulators, and other business entities as per requirements.

#7 Skill India Digital Platform

A unified Skill India digital platform will be introduced for upskilling youth. They will then be linked to employers, including MSMEs, and will be educated about several government schemes to foster entrepreneurial spirits.

#8 PM Vishwakarma Kaushal Samman (PM VIKAS)

PM VIKAS has been introduced to aid traditional artisans and craftspeople in improving their product quality and scaling their operations while enabling them to integrate into the MSME value chain. This will further advance the cause of financial inclusion and give a fillip to women and other socially disadvantaged groups-led enterprises. 

Furthermore, Budget 2023 has announced several sectoral reforms related to agriculture, fisheries, animal husbandry, infrastructure, and the like, which will have a positive impact on MSMEs related to these sectors.

All in all, a record Rs. 22,138 crores have been allocated to the MSME ministry in this year’s budget, which spotlights the government’s recognition of the meaningful role played by MSMEs in stimulating economic growth.

MSMEs Revving Up

There is little doubt that the recently introduced budget provisions will have a significant positive impact on the MSME sector. Besides, as China + 1 sentiments gain traction, MSMEs are well-positioned to expand their exports and operations.

Additionally, MSMEs are likely to benefit from the relaxation of the rules announced by the GST Council, which are set to go into force from October 2023. According to these regulations, small businesses that want to go online and have a turnover of up to Rs 40 lakhs/ 20 lakhs for goods/services are exempt from the necessity to register for GST.

Finally, with GSTN being onboarded to the Open Network for Digital Commerce (ONDC), more credit access avenues are set to open for MSMEs. This will enable MSMEs to enhance their business efficiencies while addressing bigger markets.

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