What is the issue?
A rescue plan for liquidity-hit MSMEs is the need of the hour to overcome the impacts of demonetisation and GST.
Why is there a liquidity crisis in the MSME sector?
- The GST was expected to boost manufacturing, capital expenditure, employment, tax revenue and formalisation of the informal sector.
- However, these objectives remain mostly unrealised due to disruptions in circulation of unaccounted/informal business capital/working funds following demonetisation and GST.
- The major reason for liquidity crisis in the system is attributed as the impact of GST.
- There is an acute shortage of liquidity in terms of formal business capital to finance GST transactions.
- This is because many MSME companies hold Unaccounted business capitalthat carries the stigma of black money.
- Its use in formal transactions carries risk and fear of income tax scrutiny, harassment and retrospective tax.
- Thus, unaccounted business capital/funds, whichhas not been circulated into the economy, is creating unprecedented liquidity crisis across businesses.
- Also, since these unaccounted capital were treated on par with black money under voluntary income disclosure schemes, it has furtherdisincentivised its conversion into formal money.
- Further, during demonetisation, a part of unaccounted business capital got deposited in bank accounts with relaxed KYC norms.
- But post-demonetisation, the withdrawal of these deposited amount requires full KYC compliance and subsequent monitoring by income tax authorities.
- Thus,these money have been left to remain in bank deposits by businesses.
- This shows that demonetisation has further reduced fund availability for businesses.
What are the measures needed to bring informal businesses under GST?
- All the unaccounted funds/cash holdings/bank deposits of a business need to be deposited in a designated current account of a bank linked to business activities under GST.
- It should be made mandatory that these deposits be used for business transactions only.
- Formalisation of MSMEs can work only if the conversion of unaccounted capital that are earned from legitimate business activities is formalised with a low penalty.
- Thus, once the unaccounted income gets deposited, a graded penalty upfront on the total declared deposits/cash may be imposed.
- Eg: 10% up to ₹50 lakh and 20% for ₹50 lakh to ₹2 crore.
- And this penalty provision should be allowed only to GST-registered firms, restricted up to deposits of ₹2 crore.
- This will enormously help businesses to increase their business under GST.
What will be the advantages of bringing MSME into formal net?
- The supply chain financing network can be boosted without loss of time.
- Transmission of liquidity and late payment shocks are controlled.
- Revival of the unorganised sector will be faster, steady and efficient.
- GST revenue will leapfrog with steady growth in turnover.
- Formalisation of business transactions will be easy, faster and widespread.
- Higher growth will mitigate NPA problems and lead to better NPA asset value.
Source: Business Line
