Home / Opinion / Views /  We need to harmonize our policies to help MSMEs grow

Micro, small and medium enterprises (MSMEs), are vital for the employment they can generate and also their contribution to gross domestic product (GDP). Customer behaviour across the globe, more so after the pandemic, has trended towards purchases through e-commerce platforms, irrespective of product category, be it heavy machinery or daily-use household goods. If India is to make the most of this trend, then we must reverse all that disincentivizes MSMEs from boarding e-com platforms, so that they can address both domestic and international markets. India’s goods and services tax (GST) framework, for example, has inbuilt dichotomies that need to be fixed. Similarly, we have no regulatory clarity on recognizing part-time workers, and this hinders quick expansion.

Take GST. Its framework has mechanisms that reduce the tax and compliance burden for small offline sellers but not for online sellers. This acts as a disincentive for them to take advantage of a major market shift.

Then, the GST threshold is 40 lakh in revenue, but some states like Kerala and Telangana have reduced the limit to 20 lakh, thus putting MSMEs in these regions at a disadvantage. Besides, while offline sellers with revenues under 40 lakh need not register for GST, the moment they go online to sell their wares, or even procure inputs, GST registration becomes a prerequisite. Also, a reduced GST of 1% on turnover applies to offline sellers that are selling their wares within a city or state if their topline is under 1.5 crore, but no such provision is available for MSMEs using e-com platforms.

There is a new 1% tax-deducted-at-source levy on e-com transactions, over and above GST’s 1% tax-collected-at-source, that businesses using e-com platforms are subject to. Thus, a straight 2% upfront tax deduction on sales disincentivizes their use of online avenues to expand market reach. Tax refunds can take up to two years, which affects their cash flows for operations.

India’s indirect taxation needs immediate harmonization to put offline and online business transactions on par, especially in the context of the thin margins that micro and small enterprises work on.

Add to this the heavy compliance burden and often-contradictory provisions in our Income Tax Act, various other tax and labour laws, foreign direct investment (FDI) norms, legal metrology rules, Drugs and Cosmetics Act of 1940 and associated rules, and separate requirements for online pharmacies.

There is not just discrimination discernible in direct sales being favoured over the use of e-com platforms, there are also concerns over India’s draft foreign trade policy, which is inadequately geared for an online export thrust that would offer MSMEs a significant opportunity.

For rapid job creation by MSMEs aiming for export success, labour rules must be appropriately set. With globalization, it is important to understand universally-accepted rights of workers, the protection offered to them in terms of safety, health and working conditions, and social security provisions in case of accident, death or retirement.We also need a proper understanding of term wages for extended work hours, as our domestic practices could come in conflict with globally-accepted rights of working only eight hour a day and getting minimum wages, retirement benefits and the freedom of association that allows for collective discussions with managements in case of any violation of these rights. Some states have attempted to ease this dichotomy but then it is equally important to ensure that they do not become exploitative to rights of labour. With increasing automation in our manufacturing and service sectors, many MSME units are likely to have less than 500 employees. Part-time work will be the new normal. But this has not been coherently addressed in our labour codes. The industrial relations code also needs to be harmonized with those, and in a way that protects the rights of workers and eases the adaptation of MSMEs to automation-rich business realities.

E-commerce platforms have the pulse of various markets and are well suited to hand-hold MSMEs, imparting skills, monitoring quality and guiding production aimed at different markets. Press Note 2 of 2018 on FDI rules, however, stopped online platforms from offering products made by entities in which they had a significant direct stake. This stalled back-end investments that would have ensured the standardization of quality and packaging, apart from other such market enablers. Thus, the reduction of online sales platforms to service providers goes against our stated trade-policy goal of opening up new markets for producers, achieving a global business potential estimated at $100 billion, and thereby providing sustainable employment to young Indians.

Only 27% of online small and medium businesses were using e-commerce channels in 2015. There may have been an incremental change in this up until the onset of the covid crisis. There is no specific data on how many were on-boarded last year, but Trade India, a B2B e-com portal for small businesses, was registering around 4,000 businesses every day during the festive season, and reported robust business growth.

Our challenge is to sustain and encourage such growth, for which the entire ecosystem needs to be shorn of policy discrepancies so that MSMEs that achieve their potential, not just in the domestic arena, but globally too. It will help shape a new Indian growth story in terms of both GDP and jobs.

Aruna Sharma is a practitioner of development economics and former secretary, Government of India

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