New Delhi: The Union Budget 2018 on Thursday extended sops to micro, small and medium enterprises (MSMEs), as part of the government’s efforts to bring businesses under the formal economy’s fold.

Finance minister Arun Jaitley proposed to cut the corporate tax rate to 25% for companies with annual revenue of up to Rs250 crore. The budget also earmarked Rs3 trillion for 2018-19 under the Pradhan Mantri Mudra Yojana or Mudra scheme.

In addition, Jaitley allocated Rs3,794 crore for credit support, capital and interest subsidy to MSMEs.

Aimed at easing cash flow challenges, these announcements come against the backdrop of demonetization in November 2016 and the introduction of the goods and services tax (GST) in July 2017.

The finance minister extolled the virtues of the twin measures.

“Massive formalization of the businesses of MSMEs is taking place in the country after demonetization and introduction of GST. This is generating enormous financial information database of MSMEs’ businesses and finances. This big database will be used for improving financing of MSMEs’ capital requirement, including working capital," Jaitley said.

In last year’s budget, the government had provided tax sops to MSMEs to make them more viable, recognizing their importance in economic activity and generating employment. It had reduced the tax to 25% for companies with annual revenue of up to Rs50 crore.

This is estimated to have benefited more than 667,000 companies, covering 96% of all companies filing tax returns.

“This will benefit the entire class of micro, small and medium enterprises which accounts for almost 99% of companies filing their tax returns," Jaitley said on Thursday, adding that the revenue foregone for 2018-19 will be of Rs7,000 crore.

There are around 30 million establishments in India’s informal economy, with MSMEs having a 32% share, according to the government.

Jaitley said that the tax cut will leave companies with higher investible surplus which in turn will create more jobs.

“After this, out of about 7 lakh companies filing returns, about 7,000 companies which file returns of income and whose turnover is above Rs250 crore will remain in the 30% slab," Jaitley said.

The government will also announce measures to address the issues of non-performing assets and stressed accounts of MSMEs, Jaitley added.

Seized of the problems, the Economic Survey released on Monday said: “The MSME sector faces a major problem in terms of getting adequate credit for expansion of business activities. Latest data on credit disbursed by banks shows that out of a total outstanding credit of Rs26,041 billion as in November 2017, 82.6% of the amount was lent to large enterprises. The MSME sector received only 17.4% of the total credit outstanding."

Jaitley also announced bringing on board state-owned banks on Trade Electronic Receivable Discounting System (TReDS) platform and link it with the GST Network.

However, analysts believe that more needs to be done to address MSME concerns.

“The FM’s announcement of application of 25% tax rates to MSMEs with a new threshold of Rs250 crore while welcome is still narrow in impact on the economy and business. Still lot more to be done to increase India’s competitive advantage as the headline tax rates are falling all across the world, with now even US joining and leading the race," said Milind Kothari, managing partner at consultancy BDO India.

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