In light of the recent shock of demonetisation, the Indian government’s push to move India into a more digital, a more compliant, and subsequently a more vibrant economy was clear from the budget. With MSMEs being hit the hardest with demonetisation – the budget announced on Feb 1st laid out some good incentives to encourage growth across the MSME sector with an explicit remark that the largest employment opportunities in India lie within this sector.

The Finance Minister outlined the following initiatives that were targeted towards driving growth in the MSME sector and to drive digitization among the MSMEs.

Read : Budget 2023 – Key Highlights for Pro Micro, Small, and Medium Enterprises (MSME)

Reduction of Corporate Tax

The income tax for companies having a turnover up to 50 Crores has been reduced to 25 % from 30 %.

This reduction of 5% is a welcome move for MSMEs, as majority of them will be under this threshold. This will give additional cash liquidity for their business growth. This benefit will provide a fair platform to MSMEs, and narrow the gap between MSMEs and bigger companies. The bigger companies enjoyed a slim advantage due to a better platform and expertise to avail the various incentives, exemptions, and so on available.

Thus, this reduction of rate of tax will make the micro and small enterprise products more competitive in the market, prove cost efficient, and accelerate the growth of the business.

Digital turnover in presumptive scheme

In order to encourage MSMEs to proactively accept payments by digital mode, the concept of digital turnover is included in the Presumptive Scheme. This is applicable to businesses having turnover of not more than 2 Crores. Under this scheme, the existing rate of deemed profit of 8% is reduced to 6% in respect of the amount of total turnover or gross receipts received through digital mode. However, the existing rate of deemed profit of 8% will continue to be applicable on turnover or receipt done in cash.

Let us analyse the business benefits of this in 3 different scenarios.

Scenarios Business with 100 % Cash Turnover Business with 50 % Digital Turnover Business 100 % Digital Turnover
Turnover 2 crore 2crore 2 crore
Cash Turnover 2 crore 1 crore Nil
Digital Turnover Nil 1 crore 2 crore
8% Deemed Profit on cash turnover 16 lakhs 8 lakhs Nil
6 % Deemed profit on digital turnover Nil 6 Lakhs 12 lakhs
Total Profit ( Cash + Digital ) 16 lakhs 14 lakhs 12 lakhs
Firms (@ 25%) 4 Lakhs 3.5 Lakhs 3 Lakhs
Proprietary Concerns
(As per Income Tax Slabs)
2,54,925 1,93,125 1,31,325
Tax savings Firms Nil 50,000 1,00,000
Proprietary Concerns Nil 61,800 1,23,600

*Tax calculation based on FY 2017-18

Let us understand this better.

When the businessman makes the entire transaction in cash, his profit is presumed to be 16 lakhs, which is 8% of 2 crores. However, if he opts to carry out the entire transaction using digital modes (cheque or through any other digital means), his profit is presumed to be 12 lakhs, which is 6% of 2 crores. This results in tax savings of Rs 1, 00,000 for firms and Rs 1,23,600 for proprietary concerns.

Even if the businesses have half of the turnover or receipts through digital mode or banks, a saving of Rs 50,000 (25% on 14, 00,000) for firms and Rs 61,800 for proprietary concerns can be achieved. This is an advantage for MSMEs. Thus, to leverage from the benefits, MSMEs have to embrace the digital platform.

Initiatives to facilitate digitization of business

The DigiGaon initiative aims to provide high speed broadband connectivity in more than 1,50,000 gram panchayats, and impart education and skills on digital technology by end of 2017-18. This will go a long way in meeting the challenges, in terms infrastructure and skill set availability, for MSMEs in rural areas to go digital. The Government plans to promote the adoption of the BHIM app by introducing cash back schemes for merchants, and Aadhar Pay, a merchant version of the Aadhar Enabled Payment System.

These various initiatives, along with the substantial increase in the budget allocation for digital infrastructure, and priorities to make secure and robust digital infrastructure in urban areas and to a large extent in rural areas, will help in driving the MSMEs to move towards a cashless economy.

Sweeter tax holiday for start-up enterprises

The tax holiday window for start-up enterprises to claim deduction, with respect to profit and gains derived from the business, is extended to 3 consecutive years out of 7 years from the existing 5-year limit. This will boost investment and lead to the creation of more employment opportunities.

Lower limit for cash payment

The threshold limit of cash payment to a person has been reduced from Rs 20,000 to Rs 10,000 in a single day. This implies that any payment in cash, above ten thousand rupees to a person in a day, will not be allowed as deduction in the computation of income from profits and gains of business or profession. It will have a greater effect on MSMEs due to their unorganized and informal pattern of working, and because they largely depend on cash for daily payments.

Secondly, wages and salaries paid by MSMEs range between Rs 8,000 to Rs 15,000. Now, from 1 April, 2017 onwards, in order to get the credit, these payments have to be made through a bank or via digital mode.

This is an enforcement to discourage cash transactions and drive the adoption of digitization for MSMEs.

Enhanced fund accessibility

The enhancement of the credit guarantee scheme for MSMEs, for loans up to Rs 2 crore (previously 1 crore) announced by the Prime Minster on 31st December, 2016, will give access to more funds to grow their businesses.

The budget incentives provided for MSMEs partly alleviates the impact of the demonetization aftermath, and drives MSMEs for better compliance through various incentives for digitization, thus creating a viable and vibrant growth path for MSMEs.

Go digital, Have Technology to leverage on the benefits and opportunities offered in the budget.