For businesses and decision makers, it would be very vital to know of the various measures adopted by the Government and how they can address the multiple challenges that businesses may face in this critical period.
Key regulations for MSMEs and SMEs since the break of COVID-19
The Government has introduced numerous reliefs at the doorstep of the MSMEs to revive their business. To give an example, one of the initiatives made by the Ministry of MSMEs was to issue a notification that notifies the criteria for calculation of investment and turnover to determine whether the enterprise falls within the limits of the revised definition of MSME;
A much required relaxation for MSME on the tax front came as a Press Release which grants further extensions to various time limits under Direct Tax and Benami laws. The Government has also introduced a few important relaxations which are:
- The due date for income tax return for the FY 2019-20 has been extended to November 30, 2020;
- The date for furnishing of TDS/TCS statements and issuance of TDS/TCS certificates of the FY 2019-20 has been extended to July 31, 2020 and August 15, 2020 respectively;
- Under Vivad se Vishwas Scheme, the declaration and payment can now be made up to December 31, 2020 without any additional payment.
Further, various notifications and circulars were issued for the compliance relaxation under the GST law as well. Another crucial point to note is that a reduced rate of TDS for specified non-salaried payments to residents and specified TCS rates by 25% for the period from May 14, 2020 to March 31, 2021. This move becomes beneficial to the taxpayer and at the same time provides more liquidity in the hands of the receiver.
From a compliance point, the Ministry of Corporate Affairs issued the Companies Fresh Start Scheme, 2020and revised the LLP Settlement Scheme, 2020, to incentivize compliance and reduce the compliance burden by providing for a one-time waiver of additional filing fees for delayed filings.
Modifications to the insolvency laws
The Finance Minister raised the minimum threshold to initiate insolvency proceedings to Rs. 1 crore from Rs 1 lakh, which largely insulates MSMEs. The increased threshold prevents the debtors to trigger an insolvency proceeding post March 24, 2020, against the MSMEs who have defaulted with a minimum amount of Rs. 1 lakh, on or before March 24, 2020.
As a subsequent step, the Government introduced an Ordinance which suspends the initiation of a corporate insolvency resolution process for any default arising on or after March 25, 2020 for six months. This will be of great help to MSMEs to revive their business as the lenders cannot file for insolvency proceedings against the borrowers for any default. On the other hand, the borrowers will not be able to declare bankruptcy during this period.
Relief measures by the Reserve Bank of India (RBI)
The RBI announced certain relief measures that are beneficial for the MSME sector, such as: (i) reduction of Cash Reserve Ratio (CRR) of all banks; (ii) a moratorium of 6 months on payment of all instalments of term loan till August 31, 2020 and (iii) reduction in the fixed reverse repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points.
The rate cuts will reduce the borrowing costs for MSMEs and the moratorium will ease the financial pressure on the MSMEs.
Special Package decoded: Reforms to revive MSMEs
The Finance Minister announced the atma-nirbhar package in response to the economic crisis created by COVID-19.
The Centre has made an upward revision to the definition of MSME that will help the MSMEs to seamlessly expand their business and attract further investments which eventually will help create more jobs. The table below provides the details of the old and revised limits:
|Definition of MSME|
(based on investment)
(based on investment + turnover)
|Micro||<25 lakh||<10 lakh||<1 crore||<5 crore|
|Small||<5 crore||<2 crore||<10 crore||<50 crore|
|Medium||<10 crore||<5 crore||<20 crore||<100 crore|
|*both manufacturing and services|
Amidst the liquidity problem faced by the MSMEs for a few years, the GoI announced collateral free and automatic loans of up to Rs. 3 lakh crore and has made them available till October 31, 2020. It is pertinent to note here that only businesses with an outstanding loan upto Rs. 25 crore and with a turnover up to Rs. 100 crore will be eligible to borrow up to 20% of their total outstanding loan as of February 29, 2020. The interest rate will be capped and there will be no guarantee fee.
This scheme will help the cash strapped MSMEs to crank up their business and pay wages to its employees.
The GoI will facilitate a provision of Rs. 20,000 crore as subordinate debt for stressed MSMEs facing an equity problem or MSMEs which are NPA. Additionally, the GoI will provide a support of Rs.4,000 crore to Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
The GoI has proposed to infuse equity through a fund of funds system with an initial corpus of Rs.10,000 crore put together in the ‘mother fund’ and disbursed amongst the smaller ‘daughter funds’. The Government anticipates that such a fund structure will help leverage a total of Rs.50,000 crore at ‘daughter funds’ level with the help of various outside investors. Such a structure will help MSMEs to expand and get listed on the main board of the stock exchange(s).
To support the ‘Make in India’ movement, the GoI has put a limit of Rs.200 crore for global tenders in government procurement tenders. Such a restriction will promote the local manufacturers and give the MSMEs a better scope to grow.
As conducting trade fairs and exhibitions will be impossible till the Covid-19 pandemic is over, the GoI will provide for thee-linkage market for MSMEs to promote their business. The GoI also assured to release all receivables due to MSMEs from the Government and the Central Public Sector Enterprises within 45 days from May 13, 2020.
Legal implications of regulations and relaxations
The strategic measures taken by the GoI to combat the pandemic will not only help the MSMEs survive but also bounce back its business. These measures can help bring back lost jobs, re-open factories, pay salaries and other outstanding dues. But the question is: for how long will it last?
One of the key issues faced by MSMEs and SMEs is the lack of legal knowledge and awareness programmes.
While these benefits are available, MSMEs must keep in mind to take the right legal steps. They should be well aware of the laws applicable to their business and should assess their business and financial position before jumping on the bandwagon to avail the benefits. Most importantly, MSMEs must be in compliance of all the laws to avoid any complication in the future.
While the GoI has introduced myriad of reforms and schemes, it is important for the MSMEs to only act upon such reforms that are most suitable for the respective businesses. The reforms have to be looked at differently for the small sized enterprises and the medium sized enterprises, to completely understand their benefits.
This authors of this article are Purvi Kapadia, partner, Rajani Associates and Jinay Shah, Associate, Rajani Associates