MSMEs have been at the forefront of the protests against GST. Many of these enterprises operated in the informal economy and several got away by paying a fraction of the taxes they should have. The new tax regime has hit them hard. For instance, MSMEs that were suppliers to large companies were clearly told by the latter to comply with the regime. If they didn’t, the larger companies couldn’t claim input tax credit.
The proposed incentives are meant to complement the drive to integrate the cash-driven unorganised sector with the formal sector that has been a major policy focus for the Narendra Modi administration.
Difficulty in accessing credit is a key obstacle MSMEs face in doing business, especially as many of them do not have immovable assets to pledge. The sector was adversely affected after last year’s ban on high-value currency.
GST Council, the federal indirect tax body led by finance minister Arun Jaitley, has been rationalising tax rates and compliance requirements for MSMEs considering the employment potential of the sector.
The government is also in the process of creating a registry of movable assets of MSMEs, which would enable banks to assess whether such assets are pledged with any other lenders before they sanction a loan.
Only about 5% of the MSME sector, which accounts for a total sale of Rs40 trillion a year, has access to formal finance from banks, said Praveen Khandelwal, secretary general of industry body Confederation of All India Traders (CAIT).
“The rest of the sector is dependent on other sources such as private money lenders for finance. MSME sector is often called the back bone of the economy and what the sector needs now is a national policy to stimulate growth,” said Khandelwal.
Another official in the finance ministry said the process of rationalisation and simplification of GST would continue. This person, who also spoke on condition of anonymity, added that the rationalisation, though, would depend on the tax revenue coming in. Since the GST rates were originally fixed in May, the Council has been rationalising rates at every meeting. In the last meeting held in Guwahati on 10 November, it shifted 178 items including detergents, shampoo and chocolates from the 28% slab to 18%.