29 November 2022
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The Small and Medium Business (SMB) sector is among the most important sectors of the economy. They are a significant contributor to the GDP, accounting for 45 percent of total industrial production, 40 percent of total exports, and 30.5 percent of services. Being a large employment generator, this sector deserves major attention in the budget 2022-23. With various COVID waves upsetting the sector, an impetus for growth is much needed.

While the government did offer some stimulus last year, problems remain and the sector is yet to come out of the woods. Technology could be a great enabler for growth among SMBs. In fact, technologies such as AI, ML, and cloud solutions could lead to massive benefits for small businesses. This could be in the form of efficiency in processes, leading to a reduction in costs. However, the biggest barrier to the adoption of technology today is the huge upfront cost associated with it.

Incentivise tech adoption among SMBs

The Budget presents a good opportunity for the government to incentivise tech adoption among SMBs. With a favourable environment that promotes the usage of technology, the right kind of tax policies, and support for upskilling, the government can bring SMBs on the path to progress.

SMBs are a great example of ushering in change through local enterprise, wherein these small companies are building in India and making a positive impact on the livelihoods and economy. The government should look at strengthening local production and supply chain with budget allocations and dedicated programmes that will address the need of Atmanirbhar Bharat.

Loss of jobs during the pandemic has meant that individuals will be looking to start small businesses. The government should encourage them by empowering them with capital and by making it easier to start a business. As migration happened during the pandemic, SMBs have also been struggling with manpower crunch. It’s an opportunity for the government to bring a formal structure to this form of employment, along with social security benefits. This will not only benefit the SMBs but the industry at large.

Ease of credit and fund flow has been a perennial demand from the sector. Thanks to the pandemic, this problem has become more acute. The government should tap into digital channels for better distribution of credit. Today, a lot of SMBs have come online and OKCredit itself has a reach across 2800 locations. The startups working with SMBs can not only execute with speed but will also implement last-mile delivery.

Reduced compliance, paperwork needed for SMBs

FM should also look at doing away with mandatory GST registration for businesses with a turnover of less than Rs 40 lakh. The reduced compliance and paperwork will bring productivity gains for these businesses, making them up and running faster. There is a case for an overall reduction in compliance burden for small businesses.

Today, a number of startups are working with SMBs digitising them, bringing them into the mainstream. Besides SMBs, this Budget should look at supporting the startups as they are bolstering the economy with jobs, innovation, and solutions to pressing problems.

Govt should assist startups

Despite a great performance, the Indian startup industry faces two major challenges: (A) many unicorns in India lack a compelling revenue base and require fund infusions to survive; and (B) the need to speed their digital transformation using technology and platforms. As a result, the government should consider assisting startups in 2022 through policies and support mechanisms that encourage domestic capital participation, a favorable investment climate in tier 2 and tier 3 cities, incentives to establish incubators in every state, tax exemptions on foreign direct investments, and a strong focus on startup infrastructure development. This will also assist Indian startups in their globalization efforts.

Relax tax burden on startup sector

It is important for the government to relax the tax burden on the startup sector which is already grappling with the onslaught of the COVID-19 crisis. M&A for retail and service startups carries a significant tax burden. Following a merger or acquisition, the Ministry of Finance may look into allowing startups to carry forward losses, allowing them to offset earlier losses against revenue and unabsorbed depreciation under Section 72A of the Income Tax Act. We are optimistic because retail and service are now a significant part of the economy in India and around the world, and they are increasing on a daily basis.

The PM recently announced National StartUp Day which is another feather in the cap for our country. It is a validation of the important role startups have played in furthering the innovation quotient of the country. From solving challenging problems faced by society to being job creators, Indian startups have attracted attention from the world. Dedicating a day to celebrate this achievement is a welcome step.

ESOP tax standards result in outflows

A major issue the startup sector faces is foreign investment. Foreigners investing in startups are taxed at half the tax rate applicable to native Indian investors. Our ESOP tax standards result in outflows of funds that do not have a corresponding inflow, so employees are required to borrow to pay taxes at the time of vesting. SaaS companies are steadily jumping out of the country as Indian startups cannot accept regular foreign currency payments from global players.

This needs to be relaxed so that the Indian entrepreneurs get the same choice of capital markets. India’s intellectual and entrepreneurial capital is transforming the digital world. Securing India’s intellectual property is just as important as securing its physical borders. Indian companies migrating abroad for capital, market access, or business ease not only pose financial risks but also threaten India’s digital sovereignty.

Simplify listing criteria for startups

Simplifying the listing criteria for startups will further encourage investment. The government can create a central fund for small start-ups with innovative ideas. Lastly, the government could allocate some amount of the Budget to redefining employment and maintenance policies for companies across India. They could initiate government-run training and qualification centers, focusing on employment opportunities in professional industries, and mandating minimum wage policies. This will ensure that every individual is skilled and would provide the startups with great professionals.

The writer is CEO and Co-Founder, OKCredit. Views are personal.

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Abdul Gh Lone