Budget 2026 Expectations for MSMEs: What Small Businesses Hope to See

Introduction

As India approaches Union Budget 2026, the nation’s Micro, Small, and Medium Enterprises (MSMEs) stand at a critical juncture. Representing over 63 million units and contributing approximately 30% to India’s GDP, the MSME sector has emerged as the backbone of the Indian economy. Yet, despite their significance, these enterprises continue to grapple with challenges ranging from limited access to credit to outdated operational frameworks. With the Finance Minister set to present the budget in the coming weeks, here’s what the MSME sector is hoping for in Budget 2026.

Understanding the Current MSME Landscape

Before diving into expectations, it’s essential to understand where Indian MSMEs stand today. The sector employs over 110 million people, making it the second largest employment generator after agriculture. However, the journey hasn’t been without obstacles. Post pandemic recovery, global economic uncertainties, and the rapid pace of digital transformation have created both opportunities and challenges for small businesses across the country.

The MSME sector budget 2026 comes at a time when small businesses are increasingly looking toward government support to navigate an evolving economic landscape. From the neighborhood grocery store to tech startups in tier 2 cities, businesses of all sizes are watching closely to see what relief measures and growth incentives the government will announce.

Credit Access: The Lifeline for Small Businesses

Perhaps the most pressing concern for MSMEs remains access to affordable credit. While various schemes have been launched over the years, the credit guarantee scheme for MSMEs 2026 is expected to receive significant attention and hopefully, substantial budgetary allocation.

Currently, many MSMEs struggle to secure loans due to lack of collateral, limited credit history, or perceived higher risk by financial institutions. The Emergency Credit Line Guarantee Scheme (ECLGS) provided crucial support during the pandemic, but as that winds down, businesses need a more permanent, robust framework. The government is shifting focus toward “Climate linked MSME loans” and “Viksit Bharat” specific credit lines for green energy adoption.

Industry bodies are advocating for an expansion of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) with increased corpus allocation. Experts suggest that raising the guarantee cover from the current 75-80% to 90% for loans up to Rs 5 crore could dramatically improve credit flow to deserving enterprises. Additionally, streamlining the claim settlement process and reducing processing time would make the scheme more attractive to lending institutions.

Beyond guarantees, MSMEs are also hoping for interest subvention schemes to be extended and expanded. A 2-3% interest subsidy on working capital loans could provide much needed breathing room for businesses operating on thin margins.

Income Tax Changes: Simplification and Relief

When it comes to income tax changes for small businesses 2026, expectations are high for measures that reduce compliance burden while providing tax relief that can be reinvested in business growth.

The presumptive taxation scheme under Section 44AD, which currently applies to businesses with turnover up to Rs 2 crore, could see its threshold raised to Rs 5 crore. This would significantly reduce compliance requirements for thousands of small businesses, allowing them to focus resources on growth rather than bookkeeping.

There’s also strong demand for rationalizing tax rates for MSMEs. A special concessional tax rate of 15-20% for businesses with turnover between Rs 50 lakh and Rs 10 crore could encourage formalization and voluntary compliance. Currently, many small businesses remain in the informal sector partly to avoid tax complexities.

Depreciation benefits on machinery and equipment purchases are another area where MSMEs seek relief. Enhanced depreciation rates of 30-40% in the first year could incentivize capital investment and modernization, particularly important as businesses look to upgrade technology and automation.

The deduction limit under Section 80JJAA for employee costs could also be enhanced, encouraging MSMEs to hire more formally and contribute to job creation. Increasing the deduction from 30% to 50% of additional wages paid to new employees would align with the government’s employment generation goals.

GST Reforms: Balancing Revenue with Ease of Compliance

GST updates in Budget 2026 are expected to focus heavily on simplification. Since its implementation in 2017, the Goods and Services Tax has undergone numerous changes, but MSMEs continue to find compliance challenging.

The composition scheme threshold, currently at Rs 1.5 crore for goods and Rs 75 lakh for services, could be unified and raised to Rs 3 crore across the board. This would bring more businesses under the simplified compliance framework, reducing their filing frequency and complexity.

There’s also anticipation around complete GST amnesty for genuine errors and late fees waivers for delayed filings, particularly for businesses that faced difficulties during economic disruptions. A one time settlement scheme for pending disputes could clear the backlog and provide a fresh start.

Input tax credit (ITC) rules may see relaxation too. Currently, businesses lose ITC if suppliers don’t file returns, which seems unfair to compliant taxpayers. Allowing provisional ITC subject to later reconciliation could improve cash flows significantly.

Quarterly filing for businesses below Rs 5 crore turnover, instead of monthly, has been a long standing demand. This would dramatically reduce compliance burden for the majority of MSMEs while still maintaining adequate tax collection.

Ease of Doing Business: Cutting Through Red Tape

The ease of doing business for Indian startups and small enterprises remains an area requiring sustained attention. Despite India’s improved ranking in global indices, ground-level entrepreneurs still encounter bureaucratic hurdles.

Budget 2026 could announce the integration of all MSME related registrations, licenses, and clearances into a single online platform. Currently, businesses need to navigate multiple portals for MSME registration, GST, labor licenses, environmental clearances, and more. A unified portal with a single registration number would save time and reduce corruption opportunities.

There’s also expectation of reforms in labor law compliance for small units. While the four labor codes aim to simplify regulations, actual implementation with MSME friendly provisions would make a real difference. Exempting businesses with fewer than 20 employees from certain compliance requirements, or allowing self certification for the first three years, could reduce harassment and inspector raj.

Land and property related reforms would also boost the sector. Simplifying lease deed requirements, reducing stamp duty for MSME units setting up in industrial areas, and creating land banks in tier-2 and tier-3 cities could decentralize industrial growth.

For startups specifically, extending the tax holiday period under Section 80-IAC from the current seven years out of ten to ten years out of fifteen would provide longer runway for achieving profitability. Additionally, relaxing the turnover and incorporation date criteria would bring more innovative ventures under the benefit umbrella.

Digital Adoption: Bridging the Technology Gap

Digital adoption incentives for small businesses represent perhaps the most forward looking expectation from Budget 2026. As the global economy becomes increasingly digital, MSMEs risk being left behind without adequate support for technology adoption.

A dedicated Digital MSME Fund with an allocation of Rs 10,000-15,000 crore could provide subsidized access to digital tools, cloud services, cybersecurity solutions, and e-commerce platforms. This could cover 50-70% of digitalization costs for businesses with turnover below Rs 5 crore.

The budget could also announce vouchers worth Rs 50,000 to Rs 2 lakh per MSME for purchasing digital solutions including accounting software, CRM systems, inventory management tools, and digital marketing services. This demand driven approach would let businesses choose solutions that fit their specific needs.

Training and skill development in digital technologies is equally important. Expanding programs like the MSME Technology Centre with focus on AI, data analytics, digital marketing, and e-commerce could help bridge the knowledge gap. Partnerships with technology companies for training at subsidized rates would scale impact.

Tax incentives for digital adoption, such as 150% weighted deduction for expenses on digitalization up to Rs 10 lakh, could accelerate transformation. Similarly, 100% depreciation on computers, servers, and digital infrastructure in the year of purchase would encourage investment.

Export Promotion and Market Access

Indian MSMEs contribute about 45% of total exports, but their global presence could be much stronger with right support. Budget 2026 might announce enhanced support under the Market Access Initiative (MAI) scheme with larger allocations for MSMEs to participate in international trade fairs and buyer-seller meets.

A dedicated MSME export finance window with concessional credit and simplified procedures could help small businesses tap global markets. Currently, export documentation and compliance requirements often overwhelm smaller units.

Quality certification subsidies are another expected measure. Covering 75-100% of costs for obtaining international certifications like ISO, CE marking, or industry-specific standards would make Indian MSMEs more competitive globally.

Infrastructure and Logistics Support

Physical infrastructure remains a constraint for many MSMEs. Budget 2026 could announce development of 50-100 new MSME clusters across  tier 2 and tier 3 cities with plug and play infrastructure, shared facilities, and efficient logistics connectivity.

Logistics cost subsidies, particularly for MSMEs in remote areas or those exporting goods, could level the playing field. A 20-30% subsidy on freight costs would significantly improve competitiveness.

The Road Ahead

As Budget 2026 approaches, the MSME sector’s expectations are clear: accessible credit, simplified taxation, reduced compliance burden, digital enablement, and infrastructure support. These aren’t just wish-list items but strategic necessities for a sector that holds the key to India’s economic growth, employment generation, and inclusive development.

The government has consistently emphasized the importance of MSMEs in achieving a developed India by 2047. Budget 2026 presents an opportunity to translate that vision into concrete policy action. Whether it’s the credit guarantee scheme for MSMEs 2026, income tax relief, or digital adoption incentives, the measures announced will shape the trajectory of millions of businesses and livelihoods.

For the MSME sector, Budget 2026 isn’t just about numbers and allocations; it’s about recognition, support, and partnership in nation-building. As small business owners across the country prepare their wish lists, they do so with hope that this budget will truly be transformative for those who form the foundation of India’s economic growth story.