Jaitley proposed lowering corporate tax to 25% for businesses with turnover of up to Rs 250 crore, and a target to lend Rs 3 lakh crore by next year under MUDRA.
MSMEs (micro, small and medium sector enterprises) got a major boost in the Union Budget 2018 in the form of a lower corporate tax of 25 percent and an allocation of Rs 3,794 crore for credit support, capital and interest subsidy, and innovations in the sector.
Announcing that MSMEs are a major engine of growth and employment in the country, finance minister Arun Jaitley proposed extending the benefit of a cut in corporate tax announced last year to companies with a turnover of up to Rs 250 crore in the financial year 2016-17.
“This will benefit the entire class of micro, small and medium enterprises which accounts for almost 99 percent of companies filing their tax returns. The estimate of revenue forgone due to this measure is Rs 7,000 crore during the financial year 2018-19,” he said adding that lower corporate income tax rate will leave them with higher investible surplus, which in turn will create more jobs.
The companies with a turnover of over Rs 250 crore will be taxed at 30 percent.
RA Shankara Narayanan, MD and CEO, Vijaya Bank, said the move will help improve jobs in the MSME sector and will take care of more funding requirements.
However, he said that these companies' repayment capacity will not improve immediately. "So it would not help banks in the immediate future (in terms of NPA reduction). MSMEs and rural sector also come under priority sector and we already have Mudra scheme in place to take care of their lending. But the sector will be helped if the economy moves forward."
Loans and NPAs in MSMEs
Given the over 30 percent share of MSMEs in India’s economy, the government will also announce measures to address the issues of non-performing assets (NPAs) and stressed accounts of MSMEs.
The credit exposure to micro and small sectors has seen a minor dip of 0.4 percent since March 2017, while that to medium sector enterprises has shrunk by as much as 8.7 percent to Rs 95,700 crore as on December 31, 2017, as per Reserve Bank of India data.
"The MSME package will provide huge relief to the sector post the demonetization and GST environment. The reduction in corporate tax rate for MSMEs up to Rs 250 crore turnover will substantially enhance their cash flows," said Dinabandhu Mohapatra, Managing Director & CEO, Bank of India.
The share of such enterprises in overall non-food credit extended by banks has declined since 2009-10, with the share of medium enterprises in overall non-food bank credit declining from 4.36 percent in 2009-10 to 1.48 percent in 2016-17.
Formalisation of the businesses of MSMEs after demonetisation and the implementation of GST (goods and services tax), has resulted in the creation of an enormous database of their businesses and finances. This database will be used for improving financing of MSMEs’ capital needs, including working capital, the finance minister said.
Jaitley also proposed to bring public sector banks and corporates on board the Trade Electronic Receivable Discounting System (TReDS) platform and link it with the GSTN (GST network). “Online loan sanctioning facility for MSMEs will be revamped for prompt decision making by the banks,” he said.
"Linking of TReDS with GSTN is a major move which will enhance usability and credibility of such platforms. Directing public sector banks and undertakings to be on TReDs platform will further help in increasing credit availability," said Kalyan Basu, MD & CEO, Invoicemart, (A.Treds Ltd - joint venture between Axis Bank Ltd. and mjunction services ltd.)
The Budget also earmarked Rs 3 lakh crore for 2018-19 under the Pradhan Mantri Mudra Yojana or Mudra scheme.
Launched in April 2015, the Pradhan Mantri Mudra (Micro Units Development and Refinance Agency) Yojna offers small business loans from Rs 50,000 to Rs 10 lakh, for a period of 5-7 years.
So far, MUDRA Yojana has led to sanction of Rs 4.6 lakh crore in credit from 10.38 crore MUDRA loans and 76 percent of loan accounts are of women and more than 50 percent of them belong to SCs, STs and OBCs.
“Refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs (non-banking financing companies),” said Jaitley.
He added that financial technology companies will also help growth of MSMEs and a group in the Ministry of Finance is examining the policy and institutional development measures needed for creating the right environment for Indian fintech companies to grow.Manish Lunia, Co-Founder of Flexiloans.com, "For the first time, the government has recognised the importance of fintech players in expanding MSME lending ecosystem. Linking of GSTN with receivables financing is a big step for MSMEs in the financing space. Government is going to give every business in India a unique business id and that's going to bring so much live data and information. Lastly- Mudra scheme is still meeting less than 20 percent of annual gap of MSMEs and while this is a great enabler - use of technology like Fintech would ensure efficient assessment and disbursal of these funds."
India Union Budget 2018: What does Finance Minister Arun Jaitley have up his sleeve? Click here for live Budget 2018 news, views and analyses.