Economic Relief Package COVID 19

COVID-19 Economic Relief Package Part-1

Finally, Modi Ji has come up with his grand 20 Lakhs Crores Relief package which seems nothing less than Lenskart depositing money in your Lenskart account. Businesses which are on ventilators require oxygen to survive but government has given medicines to them which will hopefully work in 3 months. Below are the measures from first part of the package.

1.      Government has decided to reduce TDS/TCS deduction rate by 25% for the period 14.05.2020 to 31.03.2021. Some of commonly used sections given below with reduced rates.

Section	Nature of Payment	Existing Rate of TDS	Reduced rate
194A	Interest other than interest on securities	10%	7.5%
194C	Payment of Contractors and sub-contractors	1% (individual/HUF)  2% (others)	0.75% (individual/HUF) 1.5% (others)
194H	Commission or brokerage	5%	3.75%
194-I(a)	Rent for plant and machinery	2%	1.5%
194-I(b)	Rent for immovable property	10%	7.5%
194-IA	Payment for acquisition of immovable property	1%	0.75%
194-IB	Payment of rent by individual or HUF	5%	3.75%
194-IC	Payment for Joint Development Agreements	10%	7.5%
194J	Fee for Professional or Technical Services (FTS), Royalty, etc.	2% (FTS, certain royalties, call centre) 10% (others)	1.5% (FTS, certain royalties, call centre) 7.5% (others)
194K	Payment of dividend by Mutual Funds	10%	7.5%
194M	Payment to contractor, professional fees, commission, brokerage etc. by Individual and HUF who are not liable to deduct TDS u/s 194H, 194C and 194J	5%	3.75%
194-O	TDS on e-commerce participants	1% (w.e.f. 1.10.2020)	0.75%
TCS Rates
206C(1F)	Sale of motor vehicle above 10 lakhs	1%	0.75%
206C(1H)	Sale of any other goods exceeding Rs.50 Lakhs.	0.1% (w.e.f 01.10.2020)	0.75%

*No reduction of rates where tax is required to be deducted at higher rate due to non-submission of PAN/Aadhar.

2.      Reliefs for MSME sector

a.      Emergency Working Capital facility in form of Term Loans:

Who is eligible?

MSME units having borrowings less then 25Cr and Turnover less then 100 Cr. Which is not a Non performing Assets (NPA) for Bank.

What is the relief?

20% of outstanding borrowing as on 29.02.2020 in form of a Term Loan at Concessional Interest Rate without any security.

Any other points to be noted?

Scheme is available till 31.10.2020. Term loan will have 4 year Tenor with 12 months moratorium period (i.e. No Principal payment in first year of loan).

b.      20000 Crore Subordinate Debt for stressed MSME

Who is eligible?

MSME which are NPA or are stressed.

c.       Equity infusion for MSMEs through fund of funds.

Unlike a Bank loan, the amount will be invested as equity into viable MSME businesses which have the potential for exponential growth. The Daughter Funds will own a certain percentage of the business, instead of charging a monthly interest / repayment of principal through EMIs as is the case in debt funding.

What will be the conditions for being eligible?

1.      This scheme will only be applicable only for existing profitable MSMEs with a proof of concept, a well differentiated business model, a monopolistic market share at present or in the future (based on strong entry barriers / Intellectual Property, etc).

2.      Only businesses which are growing exponentially / have the potential to grow exponentially, into a large enterprise within 5–7 years and have an IPO, are likely to attract investments from the Daughter Funds.

3.      Promoters with a strong background, and MSME units with a strong Team, sound corporate governance framework and succession plans, will have an edge over other similar MSME businesses trying to raise funds through the Daughter Funds.

4.      Similar to start-up investment funds, the only way the Daughter Funds can expect to get its money back, with some returns, is through M&A or IPO of the MSMEs in which they invest (the portfolio companies). Meaning, the daughter funds are likely to have a fund life of 7–10 years in which it must invest into MSME businesses and get as much back through M&A or IPO of portfolio companies as possible.

5.      This scheme is not going to benefit traditional MSME businesses which do not have any innovative processes / intellectual property / monopolistic market share, and will likely benefit MSMEs working in the start-up mould.

d.      MSME Definition Revised

Remarks/Analysis:

At the end there is no direct benefit given to support the industry which is on ventilator it’s just collateral free loan that too up to 20% extent. One may also note that most of the loans which is outstanding on 29.02.2020 were given based on certain security. Banks had given such loan up to certain extent of security i.e. 50-70% of the valuation. This additional Covid-19 relief loan will be easily covered up by that collateral security already mortgaged with bank in remaining valuation of such security. Also things appears much easier on news and announcement but one has to look into ground reality also to provide an actual relief. In order to pass an actual relief government may announce benefits in form of subsidy and grants.

There is no relief for MSME units which are not having any outstanding loans but due to this pandemic now require funds to get back into operating stage.

How Working Capital Limit will be computed?

Banks compute Maximum Permissible Bank Finance (MPBF) for working capital based on certain percentage of estimated turnover. A large number of MSME have already availed MPBF. At present stage most of the MSME lost turnover to the extent of one quarter resulting in low turnover. In such case how banker will agree to fund by going beyond MPBF this has to be look upon.

Also working capital cycle of various MSME’s has increased to 200-210 days wherein Drawing limit calculation has certain crietaria based on Receivables upto 90 days.

These all are the few out of many ground problems which will come across in order to reach the benefits into the hands of the needy.

3.      Direct Tax Measures

a.      All pending refunds to charitable trusts and noncorporate businesses & professions including proprietorship, partnership, LLP and Co-operatives shall be issued immediately.

b.      Income Tax Return due date increased for non-audit assessee to 30.11.2020 and for audit assessee’s to 31.10.2020.

c.       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.

Remarks:

No refund relaxation is given for Companies. It would be much helpful if government could prescribe some electronic process for the refunds which are stacked up on the desk of Assessing Officer or still not processed by the CPC Bangalore. Anyways questions should arise that how this is a relief, people are only getting money which is due to them.

4.      Relief with respect to Provident Fund

a.      The scheme introduced as part of PMGKP under which Government of India contributes 12% of salary each on behalf of both employer and employee to EPF will be extended by another 3 months for salary months of June, July and August 2020.

Who is eligible for PMGKP Scheme?

Establishment having less then 100 employees with 90% of them having wages less than Rs.15000/-.

b.      Statutory PF contribution of both employer and employee reduced to 10% each from existing 12% each for all establishments covered by EPFO for next 3 months.

Who is eligible?

All establishments covered under EPFO.

Remarks:

Apparently, it is not clear that whether employer will pass on this benefit of 2% to employees in hand salary. Ideally employees’ take-home salary should increase by 2% through this relief, however if such relief not pass on to the employees it may result net loss for the employee to that extent. This will also depend on the fact that whether employers’ contribution was included in CTC agreed upon in the employment contract with employee. Employer is not bounded by the statue to pass on this 2% relief to employee so this will entirely depend on employment contract terms.

CA. Animesh Singi

+91-9098589691

animeshsingi@gmail.com