Empowering India’s MSMEs: A Deep Dive into the Finance Act 2024

Article by Yashashri Bhat

Enacted on July 23, 2024, the Finance Act 2024 represents a pivotal development in India’s economic strategy, focusing on the empowerment of Micro, Small, and Medium Enterprises (MSMEs). Recognized as essential drivers of economic growth, innovation, and job creation, MSMEs are at the heart of India’s economic fabric. This landmark legislation introduces a range of initiatives aimed at bolstering these enterprises by addressing their specific challenges and creating a more supportive environment for their development. This article delves into the key provisions of the Finance Act 2024, examining their implications for MSMEs and how they are poised to impact the sector’s future.

1. Enhanced Tax Incentives

The Finance Act 2024 introduces several new tax incentives aimed at supporting MSMEs:

a.?????? Increased Tax Deductions: The Act raises the allowable deduction for MSMEs from 20% to 30% of their profits. This increase is intended to provide significant tax relief to small and medium enterprises, improving their cash flow and encouraging reinvestment in business operations.[1] This adjustment is expected to alleviate financial pressure and support business expansion.

b.????? Extended Tax Holiday: For MSMEs in the manufacturing sector, the Finance Act extends the tax holiday period from five to seven years. This provision is aimed at reducing the tax burden during the crucial early years of operation and is expected to encourage more investments in the manufacturing sector.

2. Facilitated Access to Credit

Access to finance remains a major challenge for MSMEs. The Finance Act 2024 addresses this issue through several initiatives:

a.?????? Subsidized Interest Rates: The Act introduces a subsidy on interest rates for loans up to Rs. 50 lakhs taken by MSMEs. This measure aims to reduce the cost of borrowing and make financing more affordable. The subsidy is expected to incentivize MSMEs to undertake expansion projects and increase their operational capabilities.[2]

b.????? Credit Guarantee Scheme Enhancement: The Act expands the Credit Guarantee Fund for MSMEs (CGTMSE) by increasing the coverage limit from Rs. 2 crore to Rs. 5 crore. This enhancement is designed to provide greater security to lenders and encourage them to extend more credit to MSMEs.

3. Support for Technology Upgradation

Technological advancement is crucial for the competitiveness of MSMEs. The Finance Act 2024 provides support in the following ways:

a.?????? Increased R&D Grants: MSMEs involved in research and development are now eligible for enhanced grants. The Act increases the R&D grant allocation from 10% to 15% of eligible expenses.[3] This increased funding is intended to spur innovation and technological upgrades within the MSME sector.

b.????? Technology Adoption Incentives: New tax credits are introduced for MSMEs investing in modern technology and digital tools. These credits are designed to encourage businesses to adopt advanced technologies, which can improve productivity and efficiency.

4. Simplified Compliance Requirements

The Finance Act 2024 aims to reduce the regulatory burden on MSMEs through various compliance measures:

a.?????? Streamlined Reporting: The Act introduces simplified reporting requirements for MSMEs with annual revenues under Rs. 1 crore. This includes reduced frequency of financial reporting and simplified documentation procedures, which will help reduce the administrative burden and compliance costs.[4]

b.????? Single-window Clearance: A new single-window clearance system for MSME registrations and approvals is established. This system is expected to expedite the process of starting and operating an MSME by reducing bureaucratic delays and improving efficiency.

5. Boosting Export Competitiveness

Exports are a vital growth avenue for MSMEs. The Finance Act 2024 includes measures to enhance export competitiveness:

a.?????? Export Credit Insurance: The Act provides for enhanced export credit insurance for MSMEs. This insurance coverage is aimed at mitigating the risks associated with international trade, such as non-payment by foreign buyers and political instability.

b.????? Duty Drawback Scheme: The Act expands the Duty Drawback Scheme to include a wider range of products and services. This expansion is intended to reduce the cost of exporting and make Indian products more competitive in the global market.

6. Encouraging Green Practices

Sustainability is becoming increasingly important for MSMEs. The Finance Act 2024 supports green practices through:

a.?????? Green Financing: MSMEs investing in environmentally friendly technologies are eligible for green financing options with favourable terms. This initiative aims to support the transition to sustainable practices and reduce the environmental impact of business operations.

b.????? Energy Efficiency Grants: The Act provides grants for MSMEs implementing energy-efficient measures. These grants are designed to lower the cost of adopting green technologies and improve energy efficiency.

7. Challenges

While the Finance Act 2024 offers substantial support to MSMEs, several challenges may arise as these enterprises navigate the new landscape:

a.?????? Implementation Hurdles: Despite the Act's provisions, the practical implementation of new policies and incentives can be complex. MSMEs may face difficulties in accessing subsidized loans, understanding new tax regulations, or navigating the simplified compliance processes.[5] Effective communication and support from government agencies will be crucial to overcoming these hurdles.

b.????? Access to Credit: Although the Act introduces a subsidy on interest rates and expands credit guarantee schemes, MSMEs may still encounter challenges in securing financing. Issues such as stringent lending criteria, inadequate financial documentation, and limited awareness of available schemes could impede their ability to fully leverage these benefits.

c.?????? Technological Adoption: The push for technology upgrades and digital tools is a positive step, but MSMEs may struggle with the associated costs and the technical know-how required. Small enterprises, in particular, might find it challenging to invest in and integrate new technologies without adequate support and resources.

d.????? Compliance and Regulatory Adaptation: While the Act simplifies certain compliance requirements, MSMEs will need to stay updated with evolving regulations and ensure they meet new standards. The transition to streamlined reporting and single-window clearance systems may require adjustments in internal processes and staff training.

e.?????? Sustainability Integration: The emphasis on green practices presents an opportunity but also a challenge. MSMEs might face difficulties in adopting sustainable practices due to initial investment costs, lack of expertise, and insufficient incentives to support a full transition to environmentally friendly operations.

Conclusion

The Finance Act 2024 represents a transformative shift in India’s approach to supporting Micro, Small, and Medium Enterprises (MSMEs). By introducing a range of measures including enhanced tax incentives, subsidized credit, technology adoption support, simplified compliance processes, and export competitiveness boosts, the Act aims to create a more favorable environment for MSMEs. These reforms are designed to address key pain points faced by MSMEs, facilitating their growth, enhancing their operational efficiency, and reinforcing their role in driving economic development.

As MSMEs adapt to these new provisions, they stand to benefit from reduced financial burdens, improved access to resources, and greater opportunities for expansion and innovation. The Act's emphasis on sustainability and technological advancement aligns with broader economic goals, ensuring that MSMEs can compete effectively in a rapidly evolving market. However, realizing these benefits will require proactive engagement from MSMEs, effective implementation of the new policies, and ongoing support from both government and financial institutions.

[1] Finance Act, No. 30 of 2024, (India), https://www.indiabudget.gov.in/doc/Finance_Bill.pdf .

[2] ibid

[3] Ministry of Finance, Government of India, Report on the Finance Act 2024, (July 23, 2024), https://www.indiabudget.gov.in/doc/Finance_Bill.pdf .

[4] Finance Act, No. 30 of 2024, (India), https://www.indiabudget.gov.in/doc/Finance_Bill.pdf .

[5] Rajiv Sharma, Empowering MSMEs through Tax Reforms: A Closer Look at the Finance Act 2024, Business Today (July 24, 2024), https://www.businesstoday.in/finance-act-msme-reforms .