India’s small and micro businesses together account for nearly a third of the GDP, more than a third of the country’s manufacturing and nearly half of all exports. In FY26, the Micro, Small and Medium Enterprises (MSME) sector was hit hard with multiple headwinds, especially due to geopolitical uncertainties, Trump tariffs and policy flip flops which have raised this sector’s compliance burden while keeping its credit needs unaddressed. Take the recent implementation of GST 2.0, which subsumed some of the earlier tax slabs of 0%, 5%, 12%, 18% and 28%+ cess to just have 0%, 5% and 18% slabs, with a 40% slab for ‘sin’ or luxury goods. This rejig meant a large number of daily use items and some aspirational products moved to lower tax slabs. While this made them cheaper for the end consumer, for the manufacturers of items where the input is now taxed more than the finished product, GST 2.0 has meant increased compliances and large amounts of working capital remaining stuck.
Now, as the Union Budget for 2026-27 approaches, several representatives from the MSME sector have highlighted these headwinds and suggested multiple solutions.
GST 2.0 fallout
The Federation of Indian Micro, Small and Medium Enterprises (FISME) has sought a time-bound and automatic refund process for the inverted duty structure created by the provisions of GST 2.0. The federation has also made a case for lower taxes: if input is taxed at 18% and finished product at 5%, FISME has suggested a concessional rate of 8%. It has also sought refund of GST payments on plant and machinery bought by small units.
For easing MSMEs’ compliance burden, the founder of Global Trade Research Initiative (GTRI), has already made a radical suggestion: 99% of small businesses should be freed of all compliance burden whatsoever by raising the exemption limit to Rs 1.5 crore. “The GST data shows that of the total 1.4 crore registrations, firms with less than Rs 1.5 crore annual turnover account for 84% of total registrations but contribute less than 7% of the tax collected. Currently, registration for GST is optional for firms with an annual turnover of less than Rs 40 lakh for goods and Rs 20 lakh for services. We recommend increasing the exemption limit to Rs 1.5 crore for goods and services. This amounts to 12-13 lakh monthly turnover, which at 10% of profit margin translates to just Rs 1.2 lakh. Only a fraction of this money will remain with the business owner after payment of working capital and fixed expenses,” he said.
Trump tariffs
On Trump tariffs, FISME has underlined the need to blunt their devastating impact through several measures: 3-5% interest subvention to exporters to reduce their cost of borrowing, doubling the NPA time period to 180 days and an additional loan of 20% of outstanding for exporters in an ECLGS type of mechanism. The MSME sector has seen sales decline of up to 60% due to the punitive tariffs by the American President, FISME has said, which could lead to a nearly 4% increase in the sector’s non-performing assets.
Meanwhile, the Association of Indian Entrepreneurs (AIE), has sought several more steps to ease the credit situation of micro units. The AIE represents gig workers, traders, micro entrepreneurs and the self-employed. Among AIE’s suggestions is allowing collateral-free credit of up to Rs one crore for micro enterprises with interest rates capped at 6-7%. Other suggestions include mandatory renewal of working capital limits for GST-compliant micro units without fresh appraisal, extending interest free loan assistance for import substitution development cost to micro enterprises and exclusive micro sector lending targets for SIDBI and state-owned banks. Any unit with up to 10 employees and a turnover of up to Rs 5 crore is deemed a micro enterprise.
The AIE has echoed the demands of FISME for export oriented micro units, seeking an export risk equalisation fund to compensate micro exporters impacted by sudden tariff hikes and a temporary duty drawback enhancement and interest relief package during tariff shocks.
Market access
In addition to export woes, the AIE has also flagged low market access for micro units and sought mandatory 30% government sourcing from these units, an assurance from the government that it will contribute EPF & ESI payments for first three years for new micro-enterprise employment and will fully reimburse apprenticeship costs borne by such units. “We seek fair access to credit policy, a predictable policy, reasonable compliance and protection from shocks we cannot control,” Founder Chairman of AIE has said while emphasising that it is not seeking any doles.
Meanwhile FISME has also flagged the overkill of Quality Control Orders by the government recently, saying “The problem is that almost half of them are on inputs or intermediate goods and have disrupted the domestic supply chains and exports”. It has sought suspension of QCOs in sectors where no proven domestic capacity exists, or where MSME jobs, exports or competitiveness are damaged.
