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Budget 2024: De-risk MSME credit inflows and boost credit access for advanced manufacturing, says Deloitte India

The interim budget 2024–25 will propose plan and non-plan expenditures, receipts, changes in tax rates, and revised estimates of the current financial year. While the budget will touch upon many facets, Deloitte India has unveiled a pre-budget booklet specifically crafted by analysing the prevalent times and offering improvements in the following times. Partners at Deloitte have suggested de-risking the credit inflows to MSMEs in the manufacturing sector. It is important to encourage capital investment and skill development to improve the capabilities of enterprises in the advanced manufacturing of intermediary goods.

To combat the risk associated with the flow of credit to micro, small, and medium enterprises (MSMEs) in the manufacturing sector, refer to this insightful piece of information that covers some of the crucial vitals from Deloitte India Union Budget 2023’s spectrum of opportunities.

Findings from the Reserve Bank of India

Recent findings from the Reserve Bank of India revealed that 13.2 per cent of credit growth for medium-sized industries in 2023 was against 47.8 per cent in the previous year. The micro and small industries experienced a 13 per cent increase as compared with 29.2 per cent in the prior year.

Despite the ongoing credit accessibility initiatives, there remains a significant need for innovative solutions to address the credit gaps that are most commonly faced by MSMEs.

How to Minimise Risks Related to Capital Flows to MSMEs?

In the current scenario, lenders generally require collateral for guarantees, but small and medium enterprises (SMEs) often don’t have enough assets to secure the funds they need. In addition, MSMEs often have limited credit history and are considered high-risk by lenders due to their higher probability of defaulting on the loan, making it hard to obtain capital.

On April 1, 2023, the Credit Guarantee Scheme for Micro and Small Enterprises increased the credit limit from Rs 2 crore to Rs 5 crore, and there’s a 50% reduction in annual guaranteed fees. Despite these changes, a 2019 report by the UK Sinha Committee, formed by the RBI, indicates that there is still a significant credit gap for MSMEs, estimated to be between Rs 20 and 25 lakh crore. Easwaran and Kanchan suggest that substantial efforts are still needed to fill this gap and support MSMEs.

Considering this prevalent situation, Easwaran, Partner and Supply Chain Leader, and Saurabh Kanchan, Partner, Deloitte India, propose a solution to minimise the risks related to capital flows to MSMEs. He suggests,

“To reduce risks in capital flows to MSMEs, particularly in industries such as automotive, electronics (manufacturing of ICs), industrial and electrical machinery, and chemicals (that saw over 5 per cent export growth from 2017 to 2022), it is advisable to promote risk mitigation tools, such as credit guarantees and insurance schemes.”

Deloitte India suggested increased credit availability for MSMEs to strengthen their capabilities in advanced manufacturing, particularly in sectors like semiconductors, medical equipment, and industrial equipment. Currently, only 15–20 per cent of MSMEs have access to formal credit. Encouraging greater formalisation could potentially lead to a significant surge in demand for formal credit, ranging between 30 and 50 per cent.

Goods and Services Tax Compliance for E-Commerce Businesses

Deloitte India’s pre-budget projections sought relief for exporters and e-commerce operators in Goods and Services Tax (GST) compliance.

According to Section 52 of the CGST Act, an e-commerce operator must collect TCS (tax collected at source) at a rate of 1 per cent on the net value of taxable supplies made by other suppliers through the operator. This applies when the operator is responsible for collecting the consideration for such supplies. Taxable supplies, in this context, do not include exempt or nil-rated supplies but do include zero-rated supplies.

In this current scenario, even when there is no Goods and Services Tax (GST) liability for zero-rated supplies covered under a Letter of Undertaking (LUT), e-commerce operators are advised to collect GST Tax Collected at Source (TCS). This is mandated when there is no independent GST collection by the suppliers. Subsequently, the supplier would apply for a cash refund of the GST/TCS amount collected by the e-commerce operator.

Deloitte India’s Projections for Budget 2024-25 underscore a strategic vision aimed at fortifying micro, small, and medium enterprises (MSMEs) by de-risking credit inflows. Now that we have a fair idea of the predictions made by Deloitte, let us wait for the interim budget to unfold. This year, Finance Minister Nirmala Sitharaman will present the interim budget for the fiscal year 2024-25 on February 1.

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