The role that India’s micro, small and medium enterprises (MSMEs) play in the country’s economic growth is evident. The sector, with over 60 million functional units, employs around 110 million people and contributes a little less than 30% to the country’s economic output and more than 40% to its exports.
The minister in-charge of MSMEs, Nitin Gadkari has made the government’s intent clear: To turn the sector into an ‘engine of growth’. That is a welcome aim.
The recently announced ₹3 trillion relief package for the sector under the Atmanirbhar Bharat plan and a slew of other policy changes by the government, including the reclassification of MSMEs, may address the liquidity needs of this financially-stressed sector. However, this is not the only area where MSMEs require intervention.
The decisions taken by the finance ministry and Reserve Bank of India have worked well in catering to the financial requirements of this cash-strapped sector. However, liquidity alone will not do enough good if small businesses must operate under a strict regulatory and taxation regime, especially when it comes to MSMEs selling their output via e-commerce channels.
What MSMEs need is an enabling regime that unlocks growth. Indeed, they are in need of what economists and sectoral experts call “a light-touch regulatory approach”. The sector is currently marred by over-regulation. From a tax-policy point of view, for example, MSMEs that seek to do business online face significant disadvantages. This is a problem in the context of shifts seen after the recent covid-induced lockdown, which gave e-commerce channels a pre-eminent role in catering to customer needs in a safe, time-bound and convenient manner. MSMEs, which were struggling to operate during the lockdown, found e-commerce to be an effective, swift and low-cost option to reach customers.
Prime Minister Narendra Modi has already detailed his vision for building world-class supply chains in India. In trying to achieve his vision, e-commerce platforms have shown the way when it comes to building technology-driven supply chains and providing a wide market access to sellers, including small businesses and artisans.
However, India’s increasing regulations for MSMEs selling their wares on e-commerce platforms could prove detrimental to this sector.
Consider what MSMEs face while going online to reach markets. The mandatory ‘country of origin’ tag is their latest regulatory entanglement, after recently-implemented tax deducted at source (TDS) and tax collected at source (TCS) requirements multiplied the complexity of their compliance management. The country-of-origin requirement for products that are already (or to be) listed on online websites is a tough one to comply with, as it may be difficult to distinguish between a finished product’s country of manufacture and its country of origin. The product could be a knockdown version of something produced in China or Taiwan but assembled in India.
Also, a lot of products are listed by artisans, kirana shop owners and micro businesses from the remotest regions of the country. These sellers, who have limited resources, may have discovered e-commerce channels only recently, and could still have some learning to do before they understand all the compliance requirements.
Small businesses that are waiting to adopt digital sales channels may also put their plans on hold if the government does not address the twin challenges of easing selling requirements (while ensuring that consumers are protected), and withdrawing the TDS that was levied on manufacturers selling via online platforms and the TCS requirement imposed on e-commerce platforms.
The sector, especially small and micro enterprises, had already been reeling under the impact of stringent goods and services tax (GST) regulations, such as those that require businesses selling online to get a GST registration, regardless of revenues.
The MSME sector would be better served by a unified approach and it is about time the nodal ministry took action on this front at the government level.
MSME minister Gadkari, who has a stellar record on his other ministerial portfolio of road transport and highways, may have to walk a treacherous path to bring various ministries—such as finance, commerce and industry and consumer affairs—onto a single platform, if he wants to achieve the government’s vision of expanding the MSME workforce by 50 million and increasing its share of India’s economic output to 50% and of exports to over 60%.
However, given Gadkari’s ability to bring different arms of the government together, the MSME ministry may possibly succeed in introducing the light-touch regulatory framework the sector so clearly needs.
If unshackled from the unnecessary regulatory burden, this sector, which currently contributes over 40% to manufacturing output, can deliver on the government’s vision of making India a global manufacturing hub.
The government has already extended a helping hand to MSMEs through a financial package and by reworking its definition of MSMEs. Now it’s time for last-lap measures to ease bottlenecks. As demand for products and services starts rising again, the government would be well advised to do all it can to alleviate this important sector’s pain and enhance its ease of doing business.
Lalit Bhasin is president, Society of Indian Law Firms.
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