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Legal Consideration for SMEs and MSMEs to Operate Business Post COVID-19

Legal Consideration for SMEs and MSMEs to Operate Business Post COVID-19 | Karo Startup
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In light of the COVID-19 pandemic, SMEs and MSMEs are most prone to its ripple effect. Policy intervention has been of utmost importance to keep this field afloat. For this, the Government of India (GoI) has adeptly introduced a slew of strategic measures and modifications to legislation to shield small and medium businesses and combat the slowdown.

For businesses and decision-makers, it is crucial to be very vital to have an understanding of the various measures adopted by the govt and the way they will address the multiple challenges that organizations may face during this critical period.

Key Regulations for SMEs and MSMEs since Covid-19 Breakdown

  1. The Government has introduced numerous reliefs at the doorstep of the MSMEs to revive their business, such as:
    • The Ministry of MSMEs has issued a notification that notifies the factors for calculating investment and turnover to see whether the enterprise falls within the boundaries of the revised definition of MSME.
    • A much-required relaxation for MSME on the tax front came as an announcement that grants further extensions to varied deadlines under taxation and Benami laws.
    • The Government has also introduced some crucial relaxations which are:
  2. The maturity date for the tax return for the FY 2019-20 has been extended to November 30, 2020;
  3. The date for furnishing of TDS/TCS statements and issuance of TDS/TCS certificates of the FY 2019- 20 has been extended to July 31, 2020, and August 15, 2020, respectively;
  4. Under the Vivad se Vishwas Scheme, the declaration and payment can now be made up to December 31, 2020, without any additional charge.

Further, various notifications and circulars were issued for compliance relaxation under the GST law and SMEs and MSMEs. Another crucial point to notice is that a reduced TDS rate for specified non-salaried payments to residents and specified TCS rates by 25% for the period from May 14, 2020, to March 31, 2021. This move becomes beneficial to the taxpayer and, at an equivalent time, provides more liquidity to the hands of the receiver.

SMEs and MSMEs | Legal Requirements for Business Continuity | Karo Startup
Source: Ops Centre

From a compliance point, the Ministry of Corporate Affairs issued The Companies Fresh Start Scheme, 2020and revised the LLP Settlement Scheme, 2020, to incentivize compliance and reduce the compliance burden by providing a one-time waiver of additional filing fees for delayed filings.

Modifications to the Insolvency Laws

The Ministry of Finance raised the minimum threshold to initiate insolvency proceedings to Rs. 1 crore from Rs 1 lakh, which largely insulates SMEs and MSMEs. The high point prevents the debtors from triggering an insolvency proceeding post-March 24, 2020, against the MSMEs who have defaulted with a minimum amount of Rs. 1 lakh March 24, 2020.

As a subsequent step, the govt introduced an Ordinance that suspends the initiation of a company insolvency resolution process for any default arising on or after March 25, 2020, for six months. This can be of great help to SMEs and MSMEs to revive their business because the lenders cannot file for insolvency proceedings against the borrowers for any default. On the other hand, the borrowers won’t be ready to declare bankruptcy during this era.

Relief Measures by the Reserve Bank of India (RBI)

The RBI announced specific relief measures that are beneficial for the MSME sector, such as

  1. Reduction of Cash Reserve Ratio (CRR) of all banks;
  2. A moratorium of 6 months on payment of all installments of term loan till August 31, 2020, and
  3. Reduction within the fixed reverse repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points.

The rate cuts will reduce the borrowing costs for MSMEs and also the moratorium will ease the financial pressure on the SMEs and MSMEs.

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