The Micro, Small, and Medium Enterprises (MSME) sector is the lifeline of the Indian economy, accounting for almost 30% of the country’s Gross Domestic Product. As growth accelerators in the economy, MSMEs offer greater opportunities for employment generation and wealth creation. 

Small businesses are still facing the aftermath of the tremors caused by the coronavirus outbreak in 2020 and its consequences. Several small companies faced severe cash crunches leading to a shut down of operations and loss of employment. 

Budget 2021 became crucial for the survival of MSMEs battling with unforeseen circumstances and the need for a financial stimulus to aid in their recovery. The Government, mindful of this need, has doubled the allocation and announced several commendable measures to set up MSMEs for success in the coming years. 

Here is a look at the critical budgetary announcements for MSMEs and how it impacts small businesses: 

Scope of Small Companies Redefined

There has been an amendment to the definition of a ‘Small Company’ in the Companies Act, 2013, wherein the criteria for turnover are raised from not exceeding Rs. 2 crores to not exceeding 20 crores, while the threshold for paid-up capital has been raised from not exceeding Rs. 50 lakhs to not exceeding Rs. 2 crores. 

The move would benefit over two lakh companies by reducing the burden of compliance through a reduction in minimum board meetings, non-applicability of cash flow statements, and lower penalties. Their annual returns could be signed by a Company Secretary or a single director, and there is no requirement for auditors’ mandatory rotation. 

Budget Outlay for MSME sector

There is an increase in the proposed capital expenditure of the MSME sector for the year. The Budget 2021 has earmarked the amount of Rs. 15,700 crores for the MSME Sector, which is more than double the allocated funds last year. The majority of the allocation would be a part of the Emergency Credit Line Guarantee Scheme. The scheme offers MSMEs and small businesses access additional financing up to 20% of their entire credit outstanding as of February 29, 2020.

Additional Read: Key Things to Know about the Union Budget 2021

Insolvency resolution framework for MSME

The Finance Minister has proposed introducing a special framework for the resolution of bankrupt MSMEs to ease out the entire process. The measures aim to strengthen National Company Law Tribunal (NCLT) framework will be strengthened, implementing e-courts for faster decision-making, and introducing alternate methods for debt resolution.

Additionally, a proposal has been introduced that permits pre-packaged insolvency resolution, where the company can prepare a restructuring plan with creditors before initiating insolvency proceedings, to speed up insolvency proceedings and enhance the flow of credit.

Additional Read: Taxation and the union budget. All you need to know

Decriminalization of Limited Liability Partnership Act.

To facilitate greater ease of doing business, the Government has introduced a new concept of ‘Small LLP’. A hybrid of a partnership and a company, Small LLPs aims to incentivize small businesses to migrate to an LLP with lesser compliances and limited liability.

It seeks to migrate small businesses into LLPs. The creation of a new category of Small LLP is expected to benefit MSMEs, as it will reduce the cost of compliance, subject to lesser penalties in the event of default. 

Set up of One Person Company

The Budget 2021 permits individuals to incorporate a One Person Company (OPC) by curbing paid-up capital and turnover restrictions. 

OPCs have the benefit of reduced compliance burden, limited liability by way of restricting the liability to the extent of the share value, reduction in the number of board meetings, perpetual succession making it easier for entrepreneurs to raise capital for business, tax flexibility, and no mandatory requirement for rotation of auditors.

Further, it provides legal status to the company to acquire loans from larger banks and enhances its social standing to attract a qualified workforce.  

Promotion of Digital Payments

With the fear of infection rising following the onslaught of the widespread pandemic, the UPI-based payments have tripled in the last year. The Budget 2021 has allocated Rs.1500 crores to boost digital payments. 

Reductions in Custom Duty

In a bid to promote an Atmanirbhar Bharat, Budget 2021 has announced slashing of custom duty across sectors to benefit domestic manufacturers. The relaxation in custom duty has been extended for iron and steel, and textile. There is also an increase in customs duty for importing materials in LED manufacturing, phone accessories, and solar parts to encourage local sourcing.

The Budget 2021 has offered much-needed relief and support to MSMEs during these unprecedented times. There is an anticipation that the proposals of Insolvency resolution and digitization will be a boon for the MSMEs, in the long run, to strive forward and translate the vision of an Atmanirbhar Bharat into reality.

At Tata Capital, we are committed to serve small businesses and are always exploring ways to partner with emerging companies in their growth journey. Reach out to us to know more about our small business offerings.

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