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Economic package : Part 1 - Important announcements relevant to the IT sector

May 14, 2020

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On 13th May, the Finance Minister made the first set of announcements, on the economic package. The measures focused on providing much needed liquidity infusion, esp for the MSME sector. Given the cash flow constraints faced by MSMEs, it’s a very welcome move and should help the tech startups and smaller IT-ITES SMEs. We look forward to this being executed quickly. In the next set of announcements, we hope to see steps towards boosting demand and consumption. Also, for the IT-ITeS sector, we urgently need the extension of tax benefits available for SEZ to enable our companies stay competitive.

Important announcements relevant to the IT sector with comments below.

MSMEs

  • Change in definition of MSMEs : New definition will be based on investment in plant/machinery and No distinction in definition for manufacturing and service enterprises. The new definition is below.
    • Micro – Investment below 1 crore & turnover upto 5 crores
    • Small – Investment below 10 crores & turnover upto 50 crores
    • Medium – Investment below 20 crores & turnover upto 100 crores

Comments: Massive change in coverage of  definition. Given that smaller companies are the most vulnerable, this is an important step to design specific measures to support them.

Update : A second revision of the turnover limit was announced on 1st June. The new definition is below.

  • Micro enterprise: investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
  • Small enterprise: investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;
  • Medium enterprise: investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.
  • Collateral-free loan for enterprises with less than 100 crores turnover and 25 crores outstanding loan.
    • Loan amount – Upto 20% of entire outstanding credit as on 29.2.2020.
    • Term of loan – 4 yrs.
    • Moratorium on principal – 12 months.
    • Govt to provide 100% credit guarantee cover to Banks & NBFCs on principal & interest.

Comments: Provides for credit extension with minimal additional procedures. This will be a faster way to generate cash for immediate essential needs.

  • Fund of funds :
    • Corpus of Rs. 10000 crores to infuse 50000 crores into MSMEs with viable business.
    • Will be operated through Mother funds and daughter funds.

Comments: This is in line with NASSCOM’s suggestion made to the FM. This will enhance capital availability for MSMEs.

  • Within 45 days, Central Govt and CPSU to honour all receivables of MSMEs.

Comments : This is in line with NASSCOM’s suggestion made to the FM. Will ease cash flow constraints of MSMEs.

  • Govt procurement: Global tenders will be disallowed for procurement tenders upto Rs 200 crores.

Comments : Move to benefit Indian companies.

  • Subordinate debt to functioning MSMEs which are classified as NPAs / Stressed.
    • Govt to provide Rs. 4000 cr to Credit Guarantee fund trust for Micro and Small Enterprises  (CGFTMSE )
    • CGTMSE to provide partial guarantee to Banks.
    • 20000 crore loan to be facilitated through this.
    • Promoters will receive the loan and infuse as equity.

EPF

  • PF scheme announced earlier under the Pradhan Mantri Garib Kalyan Yojna (PMGKY) extended by three months ( June – August 2020 ).

Comments : Only organisations with less than 100 employees, with atleast 90% employees earning less than Rs.15000, are eligible to avail this benefit.

  • Reduction in statutory PF contribution rate from 12 % to 10 % for both employers and employees for next three months. This relaxation not available for members covered under PMGKY.

Comments : Would free up a part of the wage cost for companies, and would help in easing cash flow constraints. Employees take home salary will increase.

Taxation

  • Reduced rates of TDS, for non-salaried specified payments made to residents, and rates of Tax Collection at Source for specified receipts, by 25% of the existing rates. The reduced rate of TDS will apply on payment made for contract, professional fees, interest, rent, dividend, commission and brokerage income. This will be applicable for payments made between May 14, 2020 till March 31, 2021.

Comments : Earlier this year, as part of the budget, the TDS for technical services was brought down 10% to 2%. TDS would further come to 1.5% now. This would reduce cash outflow and free up funds to be redirected for other needs.

  • Period of Vivad se Vishwas Scheme for making payment without additional amount extended to 31st December, 2020.

Comments : Will benefit those individuals/institutions planning to settle tax disputes. No additional penalty or interest to be levied if this option be used.

  • Tax audit deadline has been extended from 30th September to 31st Date of assessments getting barred on 30th September, 2020 extended to 31st December, 2020 and those getting barred on 31st March, 2021 will be extended to 30th September, 2021.

Comments : Additional time, would be useful, given the lockdown.

Others

  • Extension of up to 6 months to be provided by all Central Agencies (like Railways, Ministry of Road Transport & Highways, Central Public Works Dept, etc) for works including service contracts.

Comments : Companies facing project delays due to disruption of work in the last two months, will be benefitted.

Expectation of IT-ITeS industry which were not covered.

  1. Fiscal support of Rs.2600 crores to small IT-ITES companies, to cover 50% of the employees’ salary for a period of 3-months, so that companies do not have to undertake layoffs and employees can be redeployed once normalcy returns.
  2. Extension of tax benefits available to SEZ, for another 5 years.
  3. Utilisation of MAT credits in the new income taxation regime, which allow income tax at 22%.

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