Micro and small businesses and professional organizations play an important role in India, accounting for an estimated 45-50% of the country’s business turnover. Many multinational companies (MNCs) and large Indian business houses are increasingly snapping up such businesses and bringing them into their fold.
Here are the various schemes and benefits available to such businesses, for which they must register on the government’s Udyam portal.
The Micro, Small and Medium Enterprises Development Act
The government enacted the Micro, Small and Medium Enterprises Development Act (MSMED Act) in 2006 to promote, develop and enhance the competitiveness of such businesses and safeguard their interests. It also set up a separate ministry for MSMEs in 2007.
The MSMED Act categorizes such businesses on the basis of their turnover and their capital investment in plants, machinery and equipment. A business or a professional organization—whether a sole proprietorship (that is, run by an individual), partnership firm, limited-liability partnership firm, company, trust, society or cooperative society—is categorized as micro, small or medium based on the following criteria.
Benefits for MSMEs
The MSMED Act offers special benefits to MSMEs engaged in manufacturing or services. To get these benefits, a business must be registered on the government’s MSME/Udyam portal. All central government ministries, departments and public-sector undertakings are required to procure at least 25% of their annual value of goods or services from such enterprises.
Programmes and schemes for MSMEs
The government has rolled out several programmes and schemes for MSMEs, including:
1. Prime Minister’s Employment Generation Programme
Under this programme, the government provides financial assistance to set up self-employment ventures in rural and urban areas. It offers subsidies ranging from 15-35% for projects in the non-farm manufacturing sector that cost up to ₹50 lakh, and projects in the non-farm service sector that cost up to ₹20 lakh.
2. Credit Guarantee Scheme for Micro and Small Enterprises
Under this scheme, a credit guarantee is provided to micro and small enterprises for loans up to ₹5 crore without collateral or a third-party guarantee, subject to certain limits.
3. Entrepreneurship and Skill Development Programme
This programme aims to promote new enterprises, build capacity for existing MSMEs and inculcate an entrepreneurial culture. It applies to current as well as aspiring entrepreneurs.
4. International Cooperation Scheme
This scheme aims to help MSMEs enter the export market by facilitating their participation in international exhibitions, fairs, conferences and seminars. Under the scheme, the government covers expenditure on stalls, airfare, advertisements and so on up to certain specified limits.
The details of many more such programmes and schemes are available on the official portalwww.msme.gov.in.
Preferential treatment for MSEs
Micro and small enterprises (MSEs) can receive preferential treatment from their customers in the following ways. These are not available to medium enterprises.
- Customers of MSEs are required to pay for goods or services within 15 days of receiving them. However, this period can be extended up to 45 days if there is a written agreement between the MSE and customer.
- In case the customer delays the payment, the MSE is entitled to interest at three times the bank rate specified by the Reserve Bank of India (RBI), which will compound monthly. The RBI’s current bank rate is 6.75% a year, so the interest rate for delayed payment is about 20% a year. Paying this interest is mandatory for the customer and it cannot be avoided even if there is any agreement to the contrary.
Apart from paying a high interest, customers who delay payments cannot treat this interest as a business expenditure under the Income Tax Act. Also, if the customer has booked the expense in a particular financial year but doesn’t make the payment within the stipulated period and it remains unpaid at the end of the financial year, the expenditure booked will not be deductible that year. It will instead be deductible in the year of payment, according to Section 43B(h) of the Income Tax Act, which took effect from financial year 2023-24.
Disadvantages to customers of MSEs
Because MSEs receive preferential treatment, their customers face certain disadvantages. This causes some to procure goods or services from vendors other than MSEs, partially defeating the purpose of the government’s initiatives. Despite these limitations, the MSMED Act and various other government schemes help many such companies.
Udyam registration
MSMEs that wish to take advantage of these schemes can register under Udyam at www.msme.gov.in. The process is free, digitized and straightforward. A single-window system has been set up to help MSMEs with registration and any other issues. District industries centres also act as single-window facilities in their districts.
Prakash Hegde is a chartered accountant with Acer Tax & Corporate Services LLP.