Date: April 25, 2020
Smt. Nirmala Sitharaman,
Hon’ble Minister of Finance,
Ministry of Finance,
Government of India
Hon’ble Smt Nirmala Sitharaman ji,
This is further to my letter dated March 24, where I had made certain suggestions. Post that date, the RBI has come out with a stimulus package of
Rs.1 trillion. However, there are reports that due to the invocation of the Disaster Management Act 2005,
MSME employers are being warned that they should continue to pay the wages of their staff and workers irrespective of the lockdown and lack of ability to earn any revenue. How is this going to work? How is this fair? The government locks the cities up and then expects the expenses to be paid?
Here is the answer:
If the government expects jobs to be retained and workers’ wages to be paid, it must enforce the implementation of its own laws. Sample this:
• As per the Ministry of MSME, the Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, where payments made after 45 days are subject to an interest equal to three times the RBI rate. This is also mandatorily to be reported in the Annual Report as per Section 16 and Section 22 of the MSMED Act. This is being abused, and due to dominance of the buyer the vendors do not get compensated as decreed. In fact, even public-sector units do not adhere. Even though complaints are filed on the portal, no authority addresses them.
• Public-sector units have been mandated to procure 25 per cent of their purchases from MSMEs. However, this has never been followed and the procurement has remained at around 10 per cent.
The government being the biggest buyer can enhance the procurement by PSUs to 25 per cent with immediate effect. PSUs have commenced production. Even the Ministry of Defence has provided for procurement from MSMEs. If your government can enforce just this aspect of commercial activity through your good offices, there will be a surge of orders for the MSMEs, who will then be able to raise finance from banks as Purchase Orders will be issued by PSUs and then the orders will help sustain the MSMEs.
This will also ensure that business returns to the 700,000 tax-paying SMEs. Their businesses are completely jolted and disrupted. Even from the 70 million SMEs in the country, 99 per cent have a turnover of less than Rs.250 crore (Rs.2.5 billion). They do not have the cash to run the operation for more than a month or two, and hence the government needs to act and FAST!
We, at FIRST Construction Council, are recommending a ‘Relief Package’ that the Government of India needs to introduce for MSMEs due to the COVID-19 outbreak. Please give it due consideration.
Suggestions on Relief Package for MSMEs
• As mentioned earlier, as per the Ministry of MSME, the Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, where payments made after 45 days are subject to an interest equal to three times the RBI rate. This is also mandatorily to be reported in the Annual Report as per Section 16 and Section 22 of the MSMED Act. This is being abused, and due to dominance of the buyer the vendors do not get compensated as decreed. In fact, even public-sector units do not adhere. Even though complaints are filed on the portal, no authority addresses them.
• Public-sector units have been mandated to procure 25 per cent of their purchases from MSMEs. However, this has never been followed and the procurement has remained at around 10 per cent. This can throw a lifeline to MSMEs as due to the demand crunch, government spending can resuscitate the MSME sector alone.
• All employers who do not retrench staff during March-June 2020 and have a turnover of less than Rs.250 crore (2.5 billion) to be given a tax deduction of 25 per cent of tax payable. (MSMEs need to be defined based on turnover instead of investments. The turnover-based categorisation is transparent and in tune with economic and technological changes).
• Use security funds (like EPFO contributions) to give relief to MSMEs. What’s the point of putting so much burden on employers that they themselves collapse and insecurity of jobs arises?
• Widening of relief announced on EPFO: As announced by FM, the government will pay the EPFO contribution of employers as well as employees for three months for the firms that have less than 100 employees and where 90 per cent of employees are below 15,000/- per month. This relief should be extended to all MSMEs and the scheme should benefit all employees up to Rs.25,000 remuneration, irrespective of the percentage of the staff being under a certain salary.
• Legal compliances for PF/GST/TDS need to be considered leniently for April-June 2020.
• The Construction Workers Welfare Fund, in which Rs.300 billion has accumulated over time, is not being utilised for migrant labour welfare. Maharashtra drew upon this to the tune of Rs.2.5 billion recently. Since construction and building activity has been allowed now, these funds can be used to transport workers back from the villages or retain the ones who have not been able to go by offering them food and shelter.
• State governments and their utilities (electricity/power supply) should withdraw any fixed charge/minimum charge levied on power connections, and give additional time and grace period to industrial and commercial consumers without levy of hefty surcharges or interest/penalties/fines.
• Stock markets: The government should incentivise the listing of MSMEs on the stock exchange so that they can explore new avenue to raise funds.
• Appeal to stop auto-debit/ECS of loan instalments: While the RBI has permitted/allowed Lending Institutions to defer collection of interest and instalments for a period of three months, it has, in a way, left it to the discretion of these Lending Institutions. All lending institutions/electronic clearing be asked to hold clearance of all ECS/PDCs for a period of three months so that MSMEs can use their scarce funds for priority spending like wages and salary distribution. Allow this to be extended for six months.
• Contracts: All defaults on contracts expecting execution by March to be given a six-month extension.
• Taxpayers: Allow corporates/firms paying taxes of less that Rs.50 lakh a six-month extension.
• NPAs on loans: Loan defaults that have got triggered in January-March 2020 to be given a one-year extension.
• Working capital: Cash credit limits of MSMEs should be increased by four times to help meet their working capital requirements.
• Failure of institutions: SIDBI has been most ineffective during such times. Not only was the 59-minute loan scheme an eyewash where banks were all insisting on security, SIDBI, due to its sovereign position, usurps all funds and parks them with no objectives of helping the sector. Most of these funds are not performing or even disbursed.
A more professional intervention from the private sector would be more effective and useful.
• Vivaad se Vishwas amnesty scheme can bring in funds to the tune of at least Rs.1 trillion out of the Rs.9 trillion in disputes if worked upon aggressively. The scheme has been extended to June but it needs to be spearheaded by a Joint Secretary with a time deadline and the scheme should assure that once the dispute is conceded, the department will release all dues immediately. This should be done on a war footing even during the lockdown period while tax officers are working from home. Appeals and discussions can be carried out on video conferencing as the FM wants to promote a faceless regime anyway.
• Interest holiday: Announce an ‘interest payment holiday’ for borrowers bearing loans during January-June 2020 for six months. Only simple interest should be charged.
• Export benefits: Tax refunds and exporter drawbacks held up need to be released on an urgent basis.
We look forward to your early action in this regard.
Pratap Padode Editor-in-Chief
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