With the Union Budget 2026 on the horizon, India’s engineering exports industry has refined its agenda to address longstanding challenges, including working capital blockages, tax disparities affecting micro, small, and medium enterprises (MSMEs), and the rising costs of adopting environmentally friendly production methods. Industry bodies and exporters say addressing these issues in the upcoming Budget, to be presented by Union Finance Minister Nirmala Sitharaman, could materially lift India’s export competitiveness at a time when global demand remains uneven and cost pressures persist.
At the centre of pre-budget advocacy is the Engineering Export Promotion Council of India (EEPC India), which represents a large base of engineering manufacturers, over 60% of whom are MSMEs. The council’s recommendations this year focus on structural changes rather than fresh subsidies, aimed at improving liquidity, lowering operating costs, and aligning India’s tax framework with its manufacturing ambitions.
A key demand relates to the GST refund mechanism under the inverted duty structure, a long-standing issue for several engineering sub-sectors. In products such as bicycles and select auto components, manufacturers pay a higher GST rate, often 18%, on inputs, while the final product is taxed at a lower rate of 12%. While refunds are theoretically available, delays in processing have meant that large sums remain stuck for months, straining balance sheets.
EEPC India has proposed that 90% of GST refunds be released immediately, with the remaining 10% settled after post-verification. According to the council, such a move would unlock working capital without materially increasing fiscal risk, as the bulk of refunds are eventually cleared anyway. “Delayed GST refunds effectively turn exporters into involuntary lenders to the system, which is especially damaging for MSMEs operating on thin margins. An immediate release of 90% of refunds will ease liquidity stress, allow manufacturers to price products more competitively, and sustain export volumes in a challenging global environment,” said Chairman of EEPC India.
The council argues that faster refunds would also have downstream benefits for consumers, as manufacturers currently struggle to pass on duty advantages due to cash flow constraints.
Beyond goods and services tax (GST), energy costs and sustainability-linked investments are the other two major concerns emerging for engineering MSMEs. While larger manufacturers have access to capital and financing options for green transitions, smaller firms often find such investments prohibitively expensive despite long-term savings. To address this, EEPC India has recommended 100% depreciation on rooftop solar installations for manufacturing MSMEs, compared to the current 20-30%. The proposal is positioned as a practical climate intervention rather than an aspirational one, given the limited decarbonisation levers available to small factories.
Industry projections indicate that the adoption of rooftop solar can lead to substantial long-term reductions in electricity expenses, increase environmental, social, and governance (ESG) compliance for international markets, and decrease reliance on the grid. These benefits are becoming more pertinent as global purchasers increasingly examine supply chains.
“For MSMEs, rooftop solar is not about optics; it is the most feasible route to reducing energy costs and carbon intensity at the same time,” he said, adding that allowing full depreciation in the first year would materially change adoption economics and accelerate the sector’s transition to cleaner manufacturing.
Tax parity is the third pillar of EEPC India’s Budget pitch. The council has highlighted that non-corporate manufacturing MSMEs, partnerships, LLPs, and sole proprietorships continue to face a higher effective tax rate of around 33%, compared with 25% for private limited manufacturing companies. This 8-9% gap, EEPC argues, distorts business structures and penalises traditional MSME formats that dominate the engineering ecosystem.
The council has sought a reduced income tax rate of 25% in the upcoming Budget for all manufacturing MSMEs, irrespective of corporate structure, to level the playing field and free up resources for reinvestment. “Tax inequity weakens MSMEs precisely at the stage when they need to reinvest in capacity, technology and compliance,” he said, adding that bringing non-corporate manufacturers on par with companies will strengthen balance sheets and improve the sector’s long-term resilience.
Industry voices suggest that Budget 2026 does not need sweeping new schemes for engineering exports but sharper execution of existing frameworks. For a sector that accounts for around 24-28% of India’s merchandise exports, easing friction in taxation, energy costs and liquidity could prove decisive in converting manufacturing momentum into sustained export growth, they say.
From the automotive and auto components space, Chairman of Nashik-based Minda Metaforge, underlined the importance of aligning Budget priorities with global competitiveness pressures. “Auto component exporters are navigating rising compliance costs, volatile input prices, and intense global competition. A budget that improves cash flows through faster refunds, supports green capex, and ensures tax parity for MSMEs will directly strengthen India’s position in global automotive supply chains,” he said.
Wider industry voices echo the need for policy stability and sustainability-linked incentives. Senior Vice President at Calderys APAC, has called for targeted support for green industrial technologies, including accelerated depreciation for clean investments and GST relief on sustainable materials. “We expect Budget 2026 to further support global companies investing in India through tax relief (e.g., extended PLI for refractories), green capex subsidies, accelerated depreciation for clean technologies, and GST rebates on sustainable materials.”
He said enhanced FAME-like incentives for carbon credit trading frameworks will drive adoption. “With a Rs 1 lakh crore+ infrastructure and green push, India can lead global sustainable manufacturing, creating jobs, cutting emissions, and fueling GDP growth,” he said.
Similarly, Chairman of Delhi-based Polo Elevators, stressed the importance of predictable tax policies and ecosystem-based support for MSMEs. “Support for last-mile industrial infrastructure, skill development for technology-driven manufacturing, and ecosystem-based support, rather than fragmented subsidies, will be critical in making Indian manufacturing more resilient and globally competitive,” he said.
Source from: https://economictimes.indiatimes.com/small-biz/sme-sector/budget-2026-engineering-exports-industry-pushes-for-gst-relief-tax-parity-for-msmes/articleshow/127682185.cms
