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

Union Budget 2026-27 is out
Learn about its impact on the MSME industry of India – Union Budget 2026-27: What It Means for MSMEs in India

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their significance, these enterprises continue to grapple with challenges ranging from limited access to credit to outdated operational frameworks.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

One of the biggest concerns for MSMEs remains easy access to affordable credit. While several schemes exist, the Credit Guarantee Scheme for MSMEs 2026 is expected to be a major focus area in the coming years.

Key challenges MSMEs face today:

• Lack of collateral
• Limited credit history
• Higher risk perception by banks

The ECLGS scheme offered strong pandemic-era support, but as it phases out, businesses need a long-term and more robust credit framework.

The government is now shifting focus towards:

• Climate-linked MSME loans
• Viksit Bharat credit lines for green and sustainable businesses
  

What Industry Bodies Are Demanding

Industry experts are pushing for an expansion of CGTMSE with a larger corpus.

Key suggestions include:

• Increase guarantee cover from 75–80% to 90% for loans up to ₹5 crore
• Faster claim settlement for lenders
• Reduced processing timelines
  
  These changes could significantly improve loan approvals for genuine MSMEs.

Interest Subvention: A Big Relief for Small Businesses

Beyond guarantees, MSMEs are also hoping for interest subsidy support.
A 2–3% interest subvention on working capital loans could:

• Ease cash flow pressure
• Improve monthly liquidity
• Help businesses survive thin margins
  

For many MSMEs, even a small reduction in interest rates can make a huge operational difference.

Income Tax Changes: Simplification and Relief

MSMEs are expecting simpler tax rules and meaningful relief that reduce compliance burden and free up capital for business growth.

1. Higher Presumptive Tax Limit (Section 44AD)

The current ₹2 crore turnover limit may be increased to ₹5 crore, which would:

• Cut down bookkeeping and audit requirements
• Reduce compliance stress
• Help small businesses focus on growth instead of paperwork
  

2. Lower Tax Rates for MSMEs

There is strong demand for a special tax rate of 15–20% for MSMEs with turnover between ₹50 lakh and ₹10 crore.

This could:

• Encourage formalisation
• Improve voluntary compliance
• Bring more informal businesses into the tax net
  

3. Higher Depreciation on Machinery

MSMEs are seeking 30–40% first-year depreciation on machinery and equipment to:

• Promote capital investment
• Support automation and tech upgrades
• Improve long-term productivity
  

4. Higher Deduction for Hiring (Section 80JJAA)

Businesses want the employee cost deduction raised from 30% to 50%, which would:

• Support job creation
• Encourage formal hiring
• Reduce payroll burden

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.