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Budget 2018: What Can The State Do For MSMEs?
Tamil Nadu

Budget 2018: What Can The State Do For MSMEs?

Divya Karthikeyan

The worst hit sector in the State, there is little scope in the Budget to help MSMEs tide over GST. But will the State extend another hand?

On 14 June 2017, a Bill that would change the face of businesses in Tamil Nadu was passed in the State Assembly. AIADMK MLA and Commercial Taxes Minister KC Veeramani introduced the State Goods and Services Tax (GST) Bill to roll out on 01 July 2017 as proposed by the Centre, much to the wrath of the opposition party DMK (Dravida Munnetra Kazhagam).

Not just the DMK, the late Chief Minister J Jayalalithaa had also vehemently opposed the Bill, which aimed to simplify the indirect tax regime, reduce production costs and inflation in the country. But according to Jayalalithaa, it would snatch away the fiscal autonomy of the state.

The GST has been kind to big businesses, which have transitioned seamlessly due to prior preparation and regular discussions with the Centre. However, the worst hit are the Micro, Small and Medium Enterprises or MSMEs.

According to Jothi Sivagnanam, Professor of Economics at Madras University – “The informal sector has been crushed to the core. We do not have any information about what is happening there except for some anecdotal evidence. This area is not tracked by anybody, but it is very clear that growth has been declining severely in this sector. The MSME sector has not recovered from demonetisation and GST,” he says.

MSMEs Take A Beating

In Tamil Nadu, the automobile giants rule the roost – so much so that the State is often referred to as the Michigan of India. Essential to them are small scale ancillary units. However, these units have had to borrow money and pay interests, while larger scale industries enjoy the benefits of the GST regime.

This is worsened by the government’s move to impose a minimum of 18 percent to a maximum of 28 percent tax on small scale enterprises. But why haven’t the MSMEs adapted themselves to the GST regime as opposed to larger businesses?

The answer lies in the size of the industry. A large scale industry worth say Rs 50,000 crore, already had various duties imposed in the previous non-GST regime, unlike the MSMEs.

On the other hand, a small scale industry worth say Rs 20 lakh, had exemptions earlier. Now all of them fall under the same tax bracket, making it harder for the MSMEs to adapt to GST.

Is credit an option? Yes and no. Large scale industries are known for regularly delaying payments by 3-4 months, and this affects the working capital of the MSMEs which supply materials to them.

Further, using immovable assets such as machinery as collateral can backfire if payments are delayed. This problem has been jettisoned by the large scale industries to the MSMEs.

MSME Chairman at The Southern India Chamber of Commerce and Industry K Balasubramanian says, “Large Scale industries get away easily, as they do not have to pay any input credit. Further, there is no hard and fast rule that they must pay by a certain time, unlike MSMEs. And if the MSMEs don’t pay their taxes on time, they will get no orders.” Input credit is reduction of the tax paid on inputs, since taxes have already been paid on output. A manufacturer who has to pay Rs 450 tax on the finished product, if the tax paid on purchases is Rs.300, can claim an input credit of Rs 300 from the MSME involved in providing material, and pay only Rs 150.

A major flaw that the Centre is currently working on changing, is the imposition of service tax on labour. Around 18 percent tax has been levied on workers in MSMEs, whose only work is to convert raw material to parts for large industries. This leads to many layoffs and reduced working capital for MSMEs.

What Can Tamil Nadu Do?

The state government has little power here, as the pressure has largely come from the Centre. In November 2017, Deputy Chief Minister O Panneerselvam had announced that the State had been working on its revamping industrial policy, which was launched in 2014.

Sectors like auto and auto components, biotechnology, aerospace, defence and manufacturing will come under the purview of this policy revision. This, the government believes, might give MSMEs a better chance to keep up.

While the State budget may not provide much relief, there is the possibility of providing exemptions and providing interest-free loans of upto Rs 1 crore to MSMEs, that do not require collateral. CK Mohan, the Honorary Secretary of the Tamil Nadu Small and Tiny Industries Association, says that it is a matter of appealing to the GST Council and pushing for inclusive reform. “Job workers must be exempted and taxes on MSMEs must be brought down because 18 percent is too high,” he says.

“Additional subsidy allocation in the Budget, better infrastructure, extending help to MSMEs to adapt to technological advances, are also some things that the government can do,” he adds. But according to Mohan, all it comes down to, is a stronger lobby for MSMEs and a proactive state government that can engage with the GST Council to bring about these changes.