Indian businesses, the bulk of which are small- and medium-sized, received a massive tax break from the Finance Minister on Thursday. Arun Jaitley was willing to forego ₹7,000 crore of tax revenue to lower the tax rate for small and medium enterprises to 25 per cent next year from the existing 30 per cent.

“The biggest beneficiaries of this Budget are medium, small and micro enterprises — the units which can create massive employment opportunities,” said Chandra Shekhar Ghosh, MD, Bandhan Bank. “Besides ensuring easy access to bank loans, the government is working on measures to address bad loans and the stressed accounts of MSMEs.”

This is the latest shot in the arm for small businesses. Last year, Jaitley had given a similar tax cut to micro enterprises, which have an annual turnover under ₹50 crore. Of the 7 lakh companies that filed income tax returns last year, only about 7,000 had reported a turnover of over ₹250 crore, a mere 1 per cent. These will continue to pay tax at the standing corporate tax rate of 30 per cent.

Experts believe that the tax break will help businesses, especially those that are family-run, those in manufacturing and small factory units, to plough their gains back into the business or hire more workers, creating more jobs in the formal sector.

Unproductive tax planning structures (such as depreciation on unproductive assets to save taxes) will now give way to efficient business models resulting in increased output, believes Mahavir Lunawat, Group MD, Pantomath.

In fact, there are a host of schemes in the budget to benefit MSMEs besides the tax break. “This includes ₹3 lakh crore in funds to be made available through the MUDRA scheme,” said Sachin Seth, Partner, Financial Advisory Services, EY. “However some of the key initiatives, such as integrating GSTN and TReDS data and creating Aadhaar-like unique ID, will help in achieving exponential growth of online credit to MSMEs through digital platforms. This will cut down manual interventions for credit assessment, cash-flow validation, KYC, disbursals and collections. This will also help financial institutions keep a check on fraudulent activities and use of funds.”

Not only can the government train a better eye on MSMEs this way, this also helps companies by integrating financial assistance. A single online loan application platform can now assess overall fund requirements and underwrite risk based on their individual portfolio strategies. “This linkage of GSTN and TReDS data through digital platform adoption will lead to reduced acquisition costs and operating costs and flexibility of loan products, which can further reduce cost of funds to the MSME sector,” Seth summarised