The Union Finance Minister, Nirmala Sitharaman, earlier this month announced the Union Budget for 2021. The announcement came against a ravaged economy’s backdrop due to the Coronavirus pandemic that saw the global economy plummet down for a full year.

The budget for MSME oversees a handful of empowering measures for MSMEs and start-ups to accelerate their growth. The first-ever digital budget seeks to improve the ease of doing business and incentivising and relaxing norms for start-up fundings.

The MSME union budget highlights the following key points which affects the MSME and start-up ecosystem:

  • Incentivising incorporation of OPCs

The Finance Minister, in her speech, said that the budget would allow One Person Companies (OPCs) to grow without any cap on capital and turnover, thereby allowing them to convert into another type of company easily. The MSME finance budget also reduced the time of residency to 120 days for Indian citizens to set up an OPC. The previously allowed time was 182 days.

Additionally, the budget also ratifies Non-resident Indians (NRIs) to incorporate OPC in India. These moves aim to provide a better ecosystem for MSMEs and start-ups to grow their business in the country by removing the threshold limit of paid-up share capital and attracting foreign investors as NRIs to operate OPC in India.

The budget also offered tax benefits like claiming tax holidays till March 31, 2022, to incentivise funding for start-ups and innovators.

  • Boosting Digital Payments

The budget also proposed a Rs. 1500 crore package to empower digital transactions in India by the adoption of e-payment channels in smaller cities and spur innovations by Fintech companies.

Last year during the pandemic, the country saw an 80% increase in digital payment modes, especially in Tier II and Tier III cities. The government looks to capitalise on the momentum by providing a financial incentive to promote digital payment modes.

  • Insolvency Resolution

To make financially struggling companies more lucrative to buyers, the MSME union budget provides tax reliefs for speedier insolvency resolution proceedings. The move will seek to amend the provisions of Minimum Alternate Tax (MAT) under the Income Tax Act, 1961 to carry forward the losses incurred by firms undergoing insolvency proceedings. 

After the country oversaw low success rates for recovery of bad debts under the Insolvency and Bankruptcy Code (IBC), 2016, the government proposed this move in the budget, which will be key to provide relief to bankrupt companies and institutions looking to recover from these firms. The insolvency resolution professionals can verify income returns for companies filing for insolvency under IBC, 2016.

  • Reduction in Customs duty

The government announced for its budget that the import duty on gold, precious metals, non-alloys, alloys and stainless steels would be reduced to 7.5% from 12.5%. The move is expected to make gold and precious metals cheaper for domestic buyer.

India is the largest buyer of gold after China, with a consumption of 446.4 tons of yellow metals in 2020. The demand dipped down radically due to the government’s-imposed lockdown, which now seek to create demand in this market and make smuggling unviable. Thus, the reduction in import duty will facilitate organised trading in the market.

The move is another benefit in the budget for MSMEs, which had been suffering due to the high cost of raw materials as a result of the pandemic.

  • Slashing Exemption on Imports

Providing another boost to the MSMEs, Sitharaman announced the withdrawal of exemptions on the import of a certain kind of leather as they were being manufactured domestically by local businesses. A basic custom of 10% will be levied on the import of “wet blue chrome tanned leather, crust leather and finished leather” from nil duty.

The government has also increased import duty on raw silk and cotton to 15% while reducing the same on nylon items to help empower the domestic nylon industry. 

  • Increasing scope of ‘small companies’

The Finance Minister also announced that the government is set to revise small companies’ definition by increasing their capitalisation threshold from below INR 50 Lakhs to below INR 2 Cr., while the turnover shall not exceed INR 2. to not exceeding INR 20 Cr.

This move will trigger the influx of many small companies as defined under the Companies Act, 2013. Small companies enjoyed lesser compliances for their operation, and the current amendment in definition will invite more companies to be recognised as small companies.

Key highlights of Union Budget for MSMEs

Budget AnnouncementSectors Affected
Digital architecture to support National Education Policy and improve teaching and learning activities.Technology, Education, Start-ups
A technological framework for good governance and administration, including portals, a NCLT framework to implement e-Court’s system and alternative solutions for debt resolution.Technology, Good Governance, MSMEs
Allocation of INR 1.97 lakh crores over 5 years for incentives on production to encourage manufacturing in 13 sectors.MSMEs, Start-ups, R&I
Establishment of 7 textile parks with plug-and-play facilities to promote the textile industry.MSMEs, Start-ups
Amendments to Companies Act, 2013, which includes: A revised definition of small companiesPaid-up capital not exceeding INR 50 lakh to not exceeding INR 2 CroreTurnover not exceeding INR 2 Crore to not exceeding INR 20 CroreIncentivising formation of OPCsMSMEs, Start-ups
Allocation of INR 15,700 Crores in MSME sectorMSMEs
Tax holidays extended till March 31st, 2022 and capital gains exemptions extended for one yearStart-ups
Indirect tax proposals including: Custom duty rationalisationWithdrawal of exemptions for the electronic and mobile phone industryIncrement on duty of steel screws and plastic builders from 10% to 15%Increment if the duty on prawn feed from 5% to 15%Telecommunications, Electronics, Start-ups, MSMEs
Increased funding for National infrastructure pipelineInfrastructure, MSMEs
Focus on Roads and Highways infrastructure, including: Construction of 8,500 kms of road and 11,000 kms. of highway corridorsLowering Railway cost and electrification of broad-gauge routesImproving urban infrastructure with the adoption of PPP model for private city transportations Setup of new Metro technological projects and central counterpart funding in 4 cities.Transport, logistics, MSMEs
Investment on power infrastructure: Creation of multiple DISCOMSImplementing National Hydrogen mission for Hydrogen production from green power sources Fund allocation for Solar Energy Corporation of India and Indian Renewable Energy Development AgenciesManufacturing of solar cells and solar panels.Power, MSMEs

The new budget provides a robust ecosystem for MSMEs and start-ups to incorporate and grow with all government measures. The widening scope of OPCs and small companies is particularly expected to provide a boost to MSMEs and start-ups to normalise their day-to-day business expenses and operations in the post-Covid era.

The government also identified several sectors where technology will accentuate further growth to increase efficiency in services, governance, and quality products and services in the domestic market.

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