EFFECT OF COVID-19 ON MSME

 

The spread of Coronavirus across the world and imposition of lockdowns and social distancing by government to curb its roll out has led to a huge impairment to the economy of several countries across the world. Some sectors have been hit dismally while others finding the better ways to get through in this downfall. Like other sectors of the Indian economy, MSMEs have been smacked poorly due to lockdown imposed by the government to tackle Covid-19 pandemic. However, even before the current crisis, MSMEs growth has been marred by several challenges due to small scale of operations and limited financial and operational resources. From a worldwide perspective, it has been recognized that micro, small and medium enterprises (MSMEs) play a vital role in economic development, as they have been the primary sources of job/employment creation and output growth, not only in less developed countries but also in developed countries. MSMEs have been accepted as the engine of economic growth and for promoting equitable development.

 

In India, MSME sector usually faces tribulation while any major event is brought out by the government or by the economy drive. Starting from demonetization, implementation of GST to slowdown of the economy MSME sector has already been facing distress. The outbreak of coronavirus has further hit the MSME sector fiercely. MSME sector being a crucial part of the economy shall be dealt with in a very lenient manner. The business activities of non-essential items have been highly impacted due to imposition of lockdown. The business activities of essential items were also impacted due to certain government restrictions, disturbance in smooth trade process and panic among the masses.

 

With the introduction of financial package announced by Finance Minister Smt. Nirmala Sitaraman there shall be a sight of small relief to all the businesses specially MSMEs. With the vision of Prime Minister of India Shri. Narendra Modi to make “AATMANIRBHAR BHARAT” or “self-reliant India” and promote “Make-in-India” the businesses will strive harder and utilize the opportunity outrightly. Economy, Infrastructure, System, Demography and Demand are the strongest pillars of self-reliant India. There is a need to bring a change in the technology and infrastructure sector. With the improvement in technology and infrastructure, other sectors will be benefitted and have an urge to grow with the help utilizing new and advanced technologies. Financial sector is already facing a downfall and there is a great need to improve the financial conditions to support the economy.

 

Being the fastest growing economy, we shall create more awareness about MSME sector and focus on generating more employment, improved industrialization, decrease in imports, increase in exports, updation of technology, competitive businesses, knowledge development, wealth creation and economy growth. By registering and availing the benefits and schemes under MSME will help to achieve the growth and economies of scale. Taking into consideration all the difficult conditions and necessary measures which are already brought up and the measures to be further brought up by the government and various regulatory authorities, MSMEs shall make the best utilization of such measures initiated by government and strive harder to sustain and grow in the affecting economy.

VALUATION FOR TRANSFER OF SHARES FROM RESIDENT TO NON-RESIDENT

Valuation refers to the process of determining the present value of the asset being valued. The need for valuation of shares arises while performing certain transactions such as issue of further shares in the form of Right shares, merger and acquisitions, transfer of undertaking, etc.

Valuation is usually performed by Chartered Accountant, Cost Accountant, SEBI registered Merchant Banker, Registered Valuer or any other person as may be authorized by various laws. To derive the price of shares, various methodologies are used taking into consideration, the size of the Company and purpose of the valuation. For publicly traded shares of listed Companies, the company valuation is typically referred to as the market capitalization whereby, the value of the Company equals the total number of outstanding shares multiplied by the price of the shares.

Generally, various laws demand different valuation methods and the person who is authorized to perform the valuation. For a transaction with respect to transfer of unquoted equity shares from Indian resident to non-resident or Corporate, following laws shall be complied in terms of valuation:

1.       Section 247 of Companies Act, 2013.

Where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provision of this Act, such valuation shall be performed by a registered valuer who is qualified and experienced member of registered valuers’ organization. Such registered valuer shall make an impartial, true and fair valuation in accordance with internationally accepted valuation standards.

2.       Section 50CA, Section 56(2)(x) and Rule 11UA(1)(c)(b) of the Income-tax Rules, 1962.

Section 50 CA:

The consideration received by the transferor as part of the proposed transaction by the company shall not be less than the fair market value (FMV) as prescribed under rule 11UAA of the Income Tax Rules, 1962, which makes reference to methodology as stated in Rule 11UA (1)(c) as on the date of transfer.

Section 56(2)(x):

The consideration paid by transferee shall not be less than the FMV. If such consideration paid by transferee is less than the FMV then the difference shall be chargeable as other income to the extent of difference between the FMV and Consideration.

Rule 11UA(1)(c)(b):

Any transfer of unquoted (unlisted) shares shall be subject to determination of Fair market value calculated in accordance with the method (formula) as prescribed in the above-mentioned rule which shall not be less than book value of shares which has to be certified by a Category-I Merchant banker or Chartered Accountant and if the Valuation is done by DCF method it is compulsorily to be done by Category – I Merchant Banker.

3.       Pricing guidelines on valuation of capital instruments by Reserve Bank of India under FEMA Regulations.

When shares of an unlisted Company are transferred from a resident to non-resident, price shall not be less than the fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant.

In order to make valuation of shares in line with global business valuation practices, Reserve Bank of India (RBI) has introduced revised valuation guidelines for FDI allowing use of any internationally accepted pricing methodology which until few years back was based on Discounted Cash Flow (DCF) method only.  The Discounted Cash Flow (DCF) method is a prominent method based on the Income Approach of valuation, which is entirely based on the ‘future cash earning capacity’ of any business and thus, often leads to an optimum value scenario. While performing valuation on Discounted Cash Flow (DCF) method, the fair value is obtained while considering appropriate future growth potential and cash earning capacity. 

These guidelines emphasize on applying the revised pricing guidelines on an arm’s length basis, which helps Indian companies to comply with not only the RBI but also with transfer pricing regulations.

 

 

 

POLICY MEASURES TO UPLIFT MSME SECTOR

Ø  Introduction of topic

From a worldwide perspective, it has been recognized that micro, small and medium enterprises (MSMEs) play a vital role in economic development, as they have been the primary sources of job/employment creation and output growth, not only in less developed countries but also in developed countries. MSMEs have been accepted as the engine of economic growth and for promoting equitable development.

Like other sectors of the Indian economy, MSMEs have been hit badly due to lockdown imposed by the government to tackle Covid-19 pandemic. However, even before the current crisis, MSMEs growth has been marred by several challenges.

In order to revive the Indian economy amidst Covid-19 pandemic, the government has come up with various benefits and packages for the MSME sector which may help to scale up the businesses of such micro, small and medium enterprises with the spirit of “Aatmanirbhar Bharat” or “self-reliant India”.

Ø  Meaning of MSME-

MSME stands for Micro, Small, and Medium Enterprises. In accordance with the Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006, the enterprises are classified into two divisions:

Manufacturing enterprises – engaged in the manufacturing or production of goods in any industry

Service enterprises – engaged in providing or rendering services

Ø  New MSME Definition

The revised definition of MSME will benefit the large number of enterprises to conform under the definition of MSME and get entitled to the benefits being awarded to MSMEs.

 Revised MSME Classification

Composite Criteria: Investment and Annual Turnover
Classification	Micro	Small	Medium
Manufacturing & Services	Investment < Rs. 1 cr. and Turnover < Rs.5 cr.	Investment< Rs. 10 cr. and Turnover < Rs.50 cr.	Investment < Rs. 50 cr. and Turnover < Rs.250 cr.

Ø  How and where to register?

Obtain udyog aadhar at https://udyogaadhaar.gov.in/ with the help of Aadhar number.

Ø  Benefits of MSME Registration

·         Avail various schemes introduced by government for MSMEs

·         Protection against the delay in payment from Buyers i.e. maximum period for payment for purchase from MSME shall not exceed 45 days, in case of delay, the buyer is liable to pay interest to the supplier, at 3 times of bank rate

·         50% reduction in fee for filing patents and trademarks

·         Exemption provided while applying for government tenders

·         Under bank loan, 15% import subsidy on fully automatic machinery (capital subsidy for modern technology)

·         Financial support for participating in foreign business exposure from the Government of India

·         Becomes easy to get licenses, approvals and registrations, irrespective of field of business

·         Compensation of ISO certificate expenditure

·         Loans without guarantee, low-interest rates on loan

·         Concession in electricity bills

·         Registered MSMEs gets tariff subsidies and tax and capital subsidies

·         Gets exemption under Direct Tax Laws

Ø  Some Government initiatives to promote newly MSMEs

·         Recently introduced CHAMPIONs portal

It has been felt necessary to put up and promote a unified, empowered, robust, bundled and technology driven platform for helping and promoting the Micro, Small and Medium Enterprises (MSMEs) of the country. As the name suggests it will aim at Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength. Accordingly, the name of the system is CHAMPIONS. This is basically for making the smaller units big by helping and handholding.

Three basic objectives of the CHAMPIONS:

o    To help the MSMEs in this difficult situation in terms of finance, raw materials, labour, permissions, etc.

o    To help the MSMEs capture new opportunities including manufacturing of medical items & accessories.

o    To identify the sparks, i.e., the bright MSMEs who can withstand at present and become national and international champions.

It is a one stop solution for everything related to MSME starting from MSME registration to procuring resources, seeking guidance, giving suggestions and registering grievances.

·         MSME Samadhan

·         MSME Sambandh

·         MSME Sampark

·         Enterpreneurship and Skill Development programs

·         MSME Databank

·         PMEGP e-portal

·         Infrastructure Development programs

Ø  Some Government schemes to promote MSMEs

·         Prime Minister Employment Generation Programme (PMEGP)

·         Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE)

·         Interest Subvention Scheme

·         Credit Linked Capital Subsidy Scheme for technology upgradation

·         Gram Udyog Vikas Yojna

·         And many more schemes

Ø  Who provides MSME/SME Loans?

·         Entities registered under MSME can avail loans from following:

·         Small Industries Development Bank of India (SIDBI)

·         National Small Industries Corporation (NSIC)

·         Regional Rural Banks (RRBs)

·         Scheduled Commercial Banks (SCBs)

·         North Eastern Development Finance Corporation (NEDFi)

·         Other banks and NBFCs

Ø  Certain measures by government for businesses (including MSMEs) – a step towards AATMANIRBHAR BHARAT:

·         Rs. 3 lakh crores collateral free automatic loans for businesses including MSMEs

o    Borrowers with upto Rs. 25 crore outstanding and Rs. 100 crore turnover are eligible to avail such loan

o    Loans to have 4 year tenor with moratorium of 12 months on principal repayment

o    Interest to be capped

o    100% credit guarantee cover to Banks and NBFCs on principal and interest

o    Scheme can be availed till 31^st October, 2020

o    No guarantee fee

o    No fresh collateral

·         Rs. 20,000 crores subordinate debt for for MSMEs

o    Functioning MSMEs which are NPA or are stressed will be eligible

o    Promoters of MSME will be given debt by banks, which will then be infused by promoter as equity in the unit.

o    Government will provide a support of Rs. 4000 crores to CGTMSE

o    CGTMSE will provide partial credit guarantee support to banks

·         Rs. 50,000 crores equity infusion through MSME fund of funds

o    Funds of funds (FoF) with corpus of Rs. 10,000 crores will be set up

o    Provide equity funding for MSMEs with growth and potential viability

o    FoF will be operated through Mother fund and few Daughter funds

o    Will help to expand MSME size as well as capacity

o    Will encourage MSMEs to get listed on main board of Stock exchanges

·         Rs. 45,000 crores partial credit guarantee scheme 2.0 for NBFCs

o    NBFCs / HFCs / MFIs with low credit rating require liquidity to do fresh lending to MSMEs and individuals

o    Existing PCGS scheme to be extended to cover borrowings such as primary issuance of bonds / CPs of such entities

o    First 20% of loss will be borne by the guarantor i.e., Government of India

o    AA paper and below including unrated paper will be eligible for investment

·         Revision of MSME Definition (revised definition of MSME as mentioned above)

o    Investment limit to be revised upwards

o    Additional criteria of turnover being introduced

o    Distinction between manufacturing and service sector to be eliminated

·         Global tenders to be disallowed upto Rs. 200 crores

o    Indian MSMEs and other Companies have often faced unfair competition from foreign companies. Therefore, global tenders will be disallowed in government procurement tenders upto Rs. 200 crores

o    It will help MSMEs to increase their business

o    It will be a step towards self-reliant India and support Make in India

·         Other measures

o    E-market linkages for MSMEs to be promoted to act as a replacement for trade fairs and exhibitions

o    Fintech will be used to enhance transaction based lending using data generated by the e-marketplace

o    MSME receivables from Government and Central Public Sector Undertakings (CPSEs) to be released in 45 days

o    Rs. 30,000 crores special liquidity schemes for NBFCs /  HFCs / MFIs

Ø  Conclusion

Being the fastest growing economy, we shall create more awareness about MSME sector and focus on generating more employment, improved industrialization, decrease in imports, increase in exports, updation of technology, competitive businesses, knowledge development, wealth creation and economy growth. By registering and availing the benefits and schemes under MSME will help to achieve the growth and economies of scale.

AS-22 ACCOUNTING FOR TAXES ON INCOME

Scope and objective:-

This standard prescribes accounting treatment for taxes on income. It is applicable to Level I, Level II and Level III companies. The income accrued as shown in the financial statements may not be the same as taxable income. Accounting is done on the basis of matching concept and accrual concept whereas; taxable income has a different purview which may not allow certain incomes or expenses as recognized in the accounting statement. This difference in the calculation of accounting income and taxable income brings out the whole purpose of deriving this standard.

The taxes on income are accounted for in accordance with this Standard. The enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated prior to the adoption of this Standard as deferred tax asset/liability with a corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in case of deferred tax assets. The amount so credited/charged to the revenue reserves should be the same as that which would have resulted if this Standard had been in effect from the beginning.

Mainly, difference between Profit before tax (accounting profit) and taxable income shall be identified. If there are any differences, these differences are classified into timing differences and permanent differences.

Timing differences:

Timing differences are temporary in nature. Such differences aroused in current period shall be subsequently reversed in future period. The timing difference in taxes paid on accounting income and the actual tax liability gives rise to deferred tax assets or deferred tax liabilities, as the case may be; subject to consideration of prudence. An expense accrued or provision made in the statement of profit and loss of current year but allowed for tax purposes in subsequent years on payment basis.

For eg: difference in depreciation rates, difference in depreciation method, differences in methods of calculation.

Permanent differences:

Permanent differences as the name suggests are permanent in nature which means it cannot be subsequently reversed in future period. An expense accrued or provision made in the statement of profit and loss of current year but not allowed for tax purposes in current as well as future period. It does not result in deferred tax assets or deferred tax liabilities.

For eg: an expense or income not allowed for tax purpose.

Recognition:-

Tax expense of a certain period, comprising current tax and deferred tax, should be included in the determination of the net profit or loss for that period. Taxes on income are considered to be an expense incurred by the enterprise in earning income and are accrued in the same period as the revenue and expenses to which they relate. Such matching may result into timing differences. The tax effects of timing differences are included in the tax expense in the statement of profit and loss and as deferred tax assets, subject to the consideration of prudence or as deferred tax liabilities, in the balance sheet.

Deferred tax assets are recognised and carried forward only to the extent that there is a reasonable certainty of their realisation. This reasonable level of certainty would normally be achieved by examining the past record of the enterprise and by making realistic estimates of profits for the future. Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realized.

Measurement:-

Current tax should be measured at the amount expected to be paid to the taxation authorities, using the applicable tax rates and tax laws. Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.

Disclosure of deferred tax assets / deferred tax liabilities:-

Deferred tax assets or deferred tax liabilities should be disclosed and presented distinctly from other assets and other liabilities under a separate heading in the balance sheet.