Key takeaways for MSMEs from the Union Budget 2023

May 23, 2024
Updated on

The Union Budget 2023 has delivered a series of promising announcements that are poised to help the micro-small-and-medium enterprises (MSME) sector in India overcome various hurdles and maintain strong growth momentum. From continuing to provide capital access through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme to easing the delayed payments burden by altering the taxation model, the government has provided the MSME sector with the much-needed support. 

The MSME sector is considered as the backbone of the economy, and the government’s objective of inclusive growth relies heavily on the progress of this vast and diverse industry. The Budget announcements are aimed at easing a range of pain points that MSMEs have been facing, from formalization and accessibility issues to compliance woes. If the plans that have been laid out are properly implemented, both the last-mile customer and the financial service providers that cater to them will benefit significantly, as will the economy as a whole. Here are 5 critical announcements made in the Budget that are poised to simplify compliance, boost ease of doing business, extend financial support, and help MSMEs to multiply their growth prospects.

Capital Infusion into the CGTMSE Scheme

The move to infuse Rs. 9,000 crores into the CGTMSE Scheme is a positive development that will enable MSMEs to access credit worth Rs. 2 lakh crores. This will strengthen the scheme and foster financial inclusion and job growth in the sector. The 1% decrease in credit cost is a positive for lenders serving the underserved MSME sector. 

The CGTMSE scheme was a great initiative by SIDBI (Small Industries Development Bank of India) and the government, which has been instrumental in making sure that small businesses have access to unsecured loans through guarantee coverage to member lending institutions for the credit they extend to the eligible small businesses. The fundamental goal of the scheme is to decrease the credit gap through extending financing to micro and small businesses at the lower end of the supply chain. This underwent a series of revisions in December of last year, bringing about several modifications.

While the revamping of the scheme and the capital infusion is a step in the right direction, the 18% interest rate cap still needs to be removed. It remains to be seen whether this cap will be lifted when updated CGTMSE is launched on April 1, 2023.

Review of Existing Mandates by Regulators

The government has a clear focus on easing the delivery of financial services to citizens across the board. In her speech, the Finance Minister (FM) declared financial services to be one of the 7 pillars or ‘Saptarshi’ of the Budget. In an effort to make the financial services ecosystem more efficient and up-to-date, the FM called upon financial regulators to conduct a comprehensive review of current regulations, taking into account feedback from both the public and regulated entities in the financial services sector. This move is beneficial for both the financial services industry and consumers.

With the rise of digital lending and the growth of non-banking financial companies (NBFCs) that offer specialized products and services to under-served credit segments, the thrust on financial inclusion is highly encouraged. The assets under management of NBFCs are expected to grow by up to 12% in the fiscal year 2023. As a result, it is essential to differentiate regulations between banks and smaller NBFCs and microfinance institutions (MFIs). This will help to promote the growth of the financial services industry, enabling it to better serve the needs of a diverse range of customers.

This revisit of existing regulations is a great start to cleaning up archaic regulations and easing compliance burdens of financial services providers. This will free up capacities to invest in designing more efficient ways to deliver services to the last-mile customer like MSME who are in dire need of increased accessibility.

Consolidation of Financial Information

The Indian government has been investing heavily in building digital infrastructure to facilitate the delivery of government services countrywide, and a portion of this is dedicated to initiatives supporting MSMEs. As part of this process, India Stack, has been supporting the creation of a shared infrastructure for businesses and individuals to digitally participate in financial transactions and avail of government services with ease. 

The latest addition to these efforts is the recognition of Permanent Account Number (PAN) as a unified business identifier for digital systems by the government, as announced in the Budget. PAN is a unique 10-digit number assigned by the tax department to individuals and entities for tax purposes, and is used for availing a range of other financial services. Recognizing it as a unified business identifier is a positive move, which will streamline the management of financial information by bringing it under one umbrella, thereby reducing the compliance burden for small businesses that often struggle to keep track of multiple records and numbers. 

The other significant announcement is the implementation of DigiLocker, a secure and mobile-friendly platform for the safe storage and sharing of documents with regulatory bodies, banks, and other businesses. This, combined with a National Financial Information Registry, will eliminate the need for paper-based processes, providing faster access to credit. This centralized system is expected to improve efficiency and simplify the process for small businesses, reducing the time and resources required for compliance, which is especially beneficial for MSMEs.

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Change in Taxation Model to Address Delayed Payments

The Budget has proposed a solution to the delayed payment crisis faced by MSMEs, which is one of the biggest hurdles to their growth. It has suggested amending Section 43B of the Income Tax act by adding a new clause, which will include payments made to these enterprises. This section will stipulate that any sum paid by the buyer to MSEs beyond the 45-day deadline specified in Section 15 of the MSME Development Act will only be eligible for deduction when the payment is actually made to the MSMEs.

The positive announcement means tax deductions will now be based on payments made to MSMEs, instead of the conventional calculation method on an accrual basis. This shift is expected to improve the timely payment of dues to MSMEs, strengthening their supply chain. The amount of delayed payments owed to MSMEs is estimated to be a staggering Rs 10 lakh crores, and this new policy is expected to significantly reduce this figure. This, in turn, will improve the overall stability and competitiveness of MSMEs in the economy. By ensuring that MSMEs receive timely payments, this policy will stabilize their cash flow, allowing them to invest more in their businesses, and promote growth.

Expanding the Threshold of Presumptive Taxation

The Budget has increased the turnover limit for eligibility under presumptive taxation. Micro enterprises with a turnover of up to Rs 3 crores, up from the previous limit of Rs 2 crore, and certain professionals with a turnover of up to Rs 75 lakh, up from the previous limit of Rs 50 lakh, can now be taxed presumptively if their cash receipts do not exceed 5% of total receipts.

Presumptive taxation provides small businesses and professionals with a simplified tax filing process by eliminating the requirement for maintaining books of accounts and getting their accounts audited. Normally, businesses are required to maintain their books under the Income Tax Act. However, a micro unit or professional who opts for presumptive taxation can declare their income at a prescribed rate, simplifying the tax filing process. This move will ensure that micro enterprises are required to pay a lower tax rate based on their turnover, without the need for maintaining extensive records and accounts.

The simplified taxation system requires less paperwork and fewer compliance requirements, making it easier for micro enterprises to meet their tax obligations. It will provide a boost to small businesses, making it easier for them to operate and expand, thereby promoting entrepreneurship and economic growth.


In addition to these major announcements, the FM also announced in the Budget that the government would return 95% of the amount forfeited in relation to bid or performance security by MSMEs upon failing to execute contracts due to the impact of the pandemic. This is another positive move, which will ease the financial burden on MSMEs and help them continue on the growth path. 

By providing comprehensive support and removing unnecessary barriers, Budget 2023 aims to drive economic growth and enhance financial inclusion. Several highly anticipated announcements have been made, and the effective implementation of these plans can accelerate India’s progress towards becoming a $5 trillion economy in the near future.

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