Budget 2021: What’s In For Startups And MSME’s?

Overview

Union budget 2021 is the first budget of the decade, first after a once-in-a-century global pandemic, and only the fourth to follow a contraction in independent India’s history. The onus was clearly on the government to revive the investment cycle as private capital expenditure was out of sight. As per expectation, the capex allocation was increased by 26% with thrust on infrastructure. The budget explicitly focused on stimulating growth rather than fuel consumption. Keeping infrastructure and healthcare at its core, the fiscal consolidation path has been stretched, and it can be realised if growth remains healthy. Consistently good agriculture performance in past two years, favorable flattening of the Covid-19 affliction curve and a pick-up in government spending in past months has reduced the downside to the current fiscal’s de-growth and led to upgrades in the outlook for fiscal 2022. With monetary policy facing a challenge in fiscal 2021 and nearly running out of possibility for further rate cuts, it is well seen that the baton has now been passed on to fiscal policy.

Budget Proposals

Following are the budget proposals for 2021-2022 which rested on these six pillars:

1. Health and Wellbeing:

• Keeping Health and Wellness as centre focus of this budget, prime importance to this sector has been given through the introduction of various schemes and widening the scope of existing schemes.
• The total allocation to the health care sector is INR 2,230,000 million (including INR 350,000 million for COVID-19 vaccination), a 137 percent increase over the past year.
• Aatmanirbhar Swastha Bharat, Mission ‘Poshan’ 2.0, Urban Swachh Bharat Mission 2.0, Jal Jeevan Mission (explained below in sectoral analysis) are notable reforms in this sector.

2. Physical & Financial Capital, and Infrastructure:

• The proposition of a sharp increase in capital expenditure, INR 5.54 lakh crores allotted, which is 34.5 percent more than the BE 2020-21.
• Reforms enabling companies to become an integral part of the global supply chain and possess core competence (explained below in detail in sectoral analysis) have been proposed opening new economic corridors for this sector.

3. Inclusive Development for Aspirational India:

• Under this pillar, Agriculture and Allied sectors, farmers’ welfare and rural India, migrant workers and labour, and financial inclusion has been covered.
• Committing to the welfare of farmers notable measures include the integration of Mandis with the national market, extending SWAMITVA Scheme, setting up pricing policies (explained below in sectoral analysis)

4. Reinvigorating Human Capital:

• Widening the scope of NEP (National Education Policy) has been an integral focus.
• Legislative reforms are proposed for bringing in qualitative changes (Covered in detail in sectoral analysis)

5. Innovation and R&D:

• In Budget Speech of July 2019, the National Research Foundation was announced. The modalities have been worked out and the NRF outlay will be of INR 50,000 crores, over 5 years.
• It will ensure that the country’s overall research ecosystem is strengthened with a focus on identified national priority thrust areas.

6. Minimum Government and Maximum Governance:

• Under this pillar, it has been proposed to take further measures to rationalize the functioning of tribunals.
• To facilitate ease of doing business for entities dealing with Government or CPSEs, and carry out contracts, it has been proposed to set up a Conciliation mechanism and mandate its use for quick resolution of contractual disputes. This will instill confidence in private investors and contractors.

What’s in for MSME Sector?

Industries and businesses, especially MSMEs were badly hit due to the outbreak of COVID-19. To support the economy and MSMEs, Governments announced several measures e.g., Collateral-free automatic loans for MSMEs, the level playing field for MSMEs in global tendering during the year 20-21. Further, during the year, Government also met the long pending demand of the industry to change in the definition of MSME so that more businesses can be covered. To boost the local manufacturing and to support small players, Government further incentivized the MSMEs by way of following proposed reforms-

Proposed Reforms-

Operational Reforms:

• Focus on alternate methods of debt resolution and special framework for MSME shall be introduced.
• National Company Law Tribunal (NCLT) framework will be strengthen keeping in mind MSMEs
• E-court shall be implemented for early resolution of disputes.
• Relaxation in condition of formation of one person company
• Increasing in the threshold limit of small companies which would ease the compliance of the Companies Act, 2013

Financial Reforms:

• Allocation of INR 15700 crores for MSME sector which is double of the Budgeted Expenditure of 2020.

Tax Proposals:

• Reduction in custom duties to 7.5 percent on semis, flat, and long products of non-alloy, alloy, and stainless steels.
• Exemption in custom duty in steel scrap which are processed largely by MSME. Exemption in custom duty will boost the MSME players in steel and metal sector.
• There is an increase in custom duties on specific MSMEs products which will boost local businesses.

What’s in for Start-ups?

Proposed Reforms:

• Extension in eligibility for claiming tax holiday under Income Tax Act up to 31st March 2022 to incentivize setting up of more start-ups.
• Extension in claiming capital gain exemption for investment in start-up under Income tax Act upto 31st March 2022 to incentivize investors.
• To benefit start-ups and innovators, the government has proposed incentivizing OPCs by allowing OPCs to grow without any restrictions on paid up capital and turnover. Also, allowing their conversion and reducing the residency limit for an Indian citizen to setup an OPC from 182 days to 120 days hence allowing NRIs to incorporate OPCs in India.

Conclusion

Budget 2021 articulately spreads the message to the World that India is open for Investment amid the COVID crisis and uncertainties prevailing Worldwide. As with all Budgets, there are concrete proposals that are encouraging, but it is the execution that finally matters and we hope the Government gets it right to pave the growth currently.

There are a lot of incentives for businesses under MSME. Moreover, now more companies and startups can be covered into MSME as the investment and capital limits have increased.