Union Budget 2021 has progressive reform measures to support growth

We need more steps to support MSMEs and promote consumption

Mr. Vijay  Kalantri, President, All India Association of Industries (AIAI)   lauded the government’s move to raise additional resource for infrastructure by announcing National Monetization Pipeline and Development Finance Institution. At the same time, the government should set up credit enhancement fund to improve credit rating of private infrastructure projects. By improving credit rating of infrastructure projects, we can attract investment from pension funds, insurance funds and other long term investors said Mr. Kalantri.

The Association appreciates the Budget announcement of historic reforms such as privatization of two state-run banks, and disinvestment in Life Insurance Corporation, relaxation of FDI limit in insurance, setting up Development Finance Institution for infrastructure, etc.

The government’s mammoth budget allocation for infrastructure and Urban Swachh Bharat Mission 2.0 will stimulate investment and economic recovery and growth added Mr. Kalantri.

To improve reduce compliance burden on small firms, Hon’ble Finance Minister proposed to decriminalize certain offenses under Limited Liability Partnership (LLP) and increased turnover limit for small companies under Companies Act 2013.

In order to improve tax administration, the Finance Minister has announced faceless Dispute Resolution Panel, adopting faceless process in Income Tax Appellate Tribunal and increasing turnover limit for audit exemption to Rs. 10 crore not reopening of cases of more than 3 years, exemption from TDS, Streamlining Double Taxation and advance Tax system. .

Reacting to budget announcements, Mr. Kalantri, said, “The Budget could have emphasized on effective implementation of One District One Product scheme and Emergency Credit Guarantee Scheme for MSMEs etc.”

The Union Budget has promoted “Make in India” by increasing customs duty on MSME products on chemicals, plastics, metal, solar cells and other products. At the same time, the government should take steps to prevent illicit import practices such as under-invoicing and import of counterfeit products from foreign countries.

All India Association of Industries (AIAI) welcomes the Union Budget 2021-22 which reflects the government’s commitment to economic reforms, improving ease of doing business and increasing spending on infrastructure. At the same time, the budget has not addressed some of the pressing challenges of MSMEs, which are poor access to collateral free loans, strengthening State Finance Corporations, supply of raw materials at reasonable cost etc. The budget could have also improved liquidity in the hands of common man by announcing a direct income transfer scheme.

Unfinished Agenda

The Union Budget has rightly stressed on economic reforms and increase in infrastructure spending. At the same time, the government should provide focused policy incentives to MSMEs and units in stressed sectors to prevent unemployment. In this regard, we propose the following suggestions to support trade and industry:

Reduce GST rates: In the coming months, the government should also announce incentives for stressed sectors such as travel, tourism, automobile, by reducing GST and providing income tax relief.

The tourism sector is a prominent service sector that generates foreign exchange for the country by offering service to foreign tourists. However, the sector is subject to domestic levies such as GST and IGST, which make them globally uncompetitive.

Currently, tour operators are subject to levy of 18-23% GST on various kinds of services offered by them. There is also GST of 5% (without input tax credit) on the total billing of tour operators, which undermines their competitiveness in the global market. Tax burden in India is far higher than the 6-8% GST rates prevalent in neighbouring countries, according to sources from the tour operators. Therefore, the industry seeks ‘deemed exporter’ status on par with the IT industry to be eligible for the applicable tax benefits. The industry also wants the government to increase benefits under the Service Export from India Scheme (SEIS) from the current 7% to 10%.

Strengthen infrastructure for quality standards testing: MSMEs in India need to adopt international quality standards so that their products and services are acceptable in the global market. The government should strengthen local infrastructure for testing and certification of products and services so that MSMEs do not need to incur additional cost in getting their products tested in foreign markets. Therefore, the government should set up internationally recognized lab and testing facilities for various sectors in India. Also, the government should conduct voluntary certification programmes for MSMEs, so that they are encouraged to adopt global standards. It is a welcome move that the Quality Council of India (QCI) has introduced AYUSH Premium Marks for traditional medicine and Indian Certification for Medical Devices (ICMED) Scheme for medical devices manufacturers. We need similar voluntary certification programmes in other sectors as well to improve the credentials of local manufacturers.

Support in sourcing raw materials: Industry sources complain that MSMEs are facing cost pressure because of sharp rise in raw material prices in recent months. Especially, MSMEs in the engineering sector have witnessed considerable growth in price of steel, copper, zinc and foundry products such as hot rolled and cold rolled sheets, pig iron, cast iron. The price of the price of hot-rolled coil (HRC), which is the benchmark steel product, has already risen to a 12-year high as of December 1, 2020. Some small units have raised concern about shortage in availability of these materials in recent weeks. While the cost of raw material has increased, MSMEs are unable to pass on this increasing cost as they have already entered into long term contracts with government or corporate buyers. In order to make MSMEs globally competitive, Government of India should help them in timely access to raw materials at reasonable price. Micro and small enterprises, given their small scale of operation, may not have the facility to store raw materials in bulk. Therefore, National Small Industries Corporation (NSIC), in collaboration with PSUs such as SAIL, Coal India and NALCO should set up raw material depots or yards near MSME clusters across the country. Through these yards, the government should supply raw materials to small enterprises at fair prices, similar to the public distribution system for food grains.

Abolish TDS on e-commerce transactions: E-commerce is emerging as a convenient platform for MSMEs to reach consumers in a distant geography. However, the introduction of TDS on e-commerce sellers with gross merchandise sale of above Rs. 5 lakh can block the liquidity of SME sellers on digital platforms.

From the current financial year, Government of India introduced income tax (Tax Deduction at Source) on sale of goods through e-commerce by inserting new section 194-O in the Income Tax (IT) Act. Under this move, e-commerce operators are required to deduct 1% of gross amount of sale of goods or services through their platform before crediting the amount in the account of the online seller. The mandatory tax deduction at source adds to the already existing Tax Collection at Source (TCS) provisions under which sellers on online platforms have to collect 0.1% tax on the sale proceed for sale value above Rs. 50 lakh. Therefore, the government should either abolish the 1%TDS requirement or at least reduce this to 0.25%. Alternatively, the government may fix the 1% TDS on net sale value, instead of the gross sale value. Gross sale value includes GST and the fee of the online platform. Imposing 1% TDS on gross sale value amounts to tax on tax and hence the government may impose the TDS on net sale value.

Revamp the SEZ policy: Government of India needs to revamp SEZ policy to revive investor interest in special economic zones. In recent years, many private developers have applied for de-notification of their SEZs because of poor market condition and change in government policy on these zones. In order to make SEZs attractive for investors, the government should carry out a slew of amendments. These amendments are as follows:

Clearance from SEZs should be brought at par with Export Oriented Units (EOUs) where the import duty is payable on imported raw material used in finished goods and not on finished product itself. It is the need of the hour to liberalize the current SEZ policies to provide ease of operation and exit, procedural relaxations in clearance of goods and uniformity in administrative and financial aspects across all SEZs.