In the previous article, we have discussed in depth about capital subsidy. In this article we have discussed about interest subsidy for MSME enterprises. Government of Gujarat provides various incentives to MSME units engaged in manufacturing and service sector. One of the most important assistance is interest and interest subsidy for MSME enterprise.
What is Interest Subsidy?
Interest subsidy is reimbursement of interest expense paid by MSME enterprises with respect to their loan availed for setting up new business unit or expansion of same. Interest subsidy is available manufacturing units as well as service sector units. Purpose of interest subsidy for MSME is to reduce the financial burden on enterprises for their loans availed.
Quantum of interest subsidy for MSME Enterprise
Manufacturing Unit
Interest subsidy for manufacturing unit is available in the range of 5% to 9%, depending on multiple factors. Details of same is as below:
| Taluka Category | Quantum of subsidy |
|---|---|
| Category I | Interest subsidy @ 7% on term loan with maximum amount of Rs. 35 Lacs per annuam for a period of 7 years |
| Category II | Interest subsidy @ 6% on term loan with maximum amount of Rs. 30 Lacs per annuam for a period of 6 years |
| Category III and Municipal Corp Area | Interest subsidy @ 5% on term loan with maximum amount of Rs. 25 Lacs per annuam for a period of 5 years |
However, units are eligible for additional subsidy if below conditions are met:
| Taluka Category —> Conditions | Category I | Category II | Category III |
|---|---|---|---|
| Normal not falling in below criteria | 7.00% | 6.00% | 5.00% |
| Women Entrepreneur, Registered Startup or differently abled Entrepreneur | 8.00% | 7.00% | 6.00% |
| Women Entrepreneur, Registered Startup or differently abled Entrepreneur aged below 35 years | 9.00% | 8.00% | 7.00% |
| Other Young Enterpreneur aged below 35 years | 8.00% | 7.00% | 6.00% |
Read more about Capital Subsidy
Service Sector Unit
Interest subsidy for MSME enterprises engaged in specified service sector is eligible for interest subsidy on new machinery, equipment, and furniture/ fixtures but except land and building:
| Taluka Category | Quantum of subsidy |
|---|---|
| Category I | Interest subsidy @ 7% on term loan with maximum amount of Rs. 35 Lacs per annuam for a period of 7 years |
| Category II | Interest subsidy @ 6% on term loan with maximum amount of Rs. 30 Lacs per annuam for a period of 6 years |
| Category III and Municipal Corp Area | Interest subsidy @ 5% on term loan with maximum amount of Rs. 25 Lacs per annuam for a period of 5 years |
1.00% additional subsidy is available to registered start up in service sector and having Udyam registration. Below are the list of service sectors eligible to claim interest subsidy:
- Financial services
- Health services
- Transport and Logistics services
- Audio Visual services
- Construction related engineering services
- Environmental services
Service sector has also need to give permanent employment to minimum 10 persons and enterprise must have GST registration.
Conditions for availing interest subsidy
- Interest subsidy is available to MSME enterprises which are setting up new manufacturing facility or service sector business. Interest subsidy is also available for enterprises which planning for expansion of their existing business. For Expansion there is condition that expansion should be at least 50% increase in FCI. Out of which at least 60% investment should be in Plant and Machineries. Fixed Capital Investment means the investment made in building, plant and machineries, utilities, tools and equipments and other assets required for the manufacturing of the end product. It is important to note that land is not considered as part of FCI.
- Interest subsidy has to be applied within 1 year from date of their first disbursement of the loan or date of start of commercial production/ rendering services which ever is later.
- Subsidy will be only paid after commencement of commercial production/ rendering services
- In any case, enterprise has to bear at least 2% interest on the loan.
- Enterprise is not eligible for subsidy if loan is sanction after 1 year of from the date of commercial production/ rendering services.
- Enterprise has to comply with relevant norms of GPCB or other competent authority.
Financial Analysis of Subsidy benefit
| Project Cost | 500 | Lacs Rs. |
| Funded Through | ||
| Debt – 75% | 375 | Lacs Rs. |
| Equity – 25% | 125 | Lacs Rs. |
| Capital Subsidy available | 25% | Assumed |
| Interest Rate | 10% | Assumed |
| Subsidy avaialable | 6% | Assumed |
| Loan Period | 6 Years | Assumed |
| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
|---|---|---|---|---|---|---|
| Sales | 500.00 | 525.00 | 551.25 | 578.81 | 607.75 | 638.14 |
| COGS | -425.00 | -446.25 | -468.56 | -491.99 | -516.59 | -542.42 |
| Other cost | -10.00 | -10.50 | -11.03 | -11.58 | -12.16 | -12.76 |
| Interest Cost | -37.50 | -31.25 | -25.00 | -18.75 | -7.50 | -6.25 |
| PAT Before Interest Subsidy | 27.50 | 37.00 | 46.66 | 56.50 | 71.51 | 76.71 |
| PAT Before Interest Subsidy | 5.50% | 7.05% | 8.46% | 9.76% | 11.77% | 12.02% |
| Interest Subsidy | 22.50 | 18.75 | 15.00 | 11.25 | 7.50 | 3.75 |
| PAT after Interest subsidy | 50.00 | 55.75 | 61.66 | 67.75 | 79.01 | 80.46 |
| PAT after Interest subsidy | 10.00% | 10.62% | 11.19% | 11.70% | 13.00% | 12.61% |
We can check from above analysis that if MSME unit avails the term loan and interest subsidy then in the initial years, their Cash PAT increases as much as ~90% as compared to cash PAT if subsidy not availed. This can help MSME enterprises tremendously to grow their business and sustain in the growing competition.
How we can help?
We are actively engaged in providing comprehensive financial services which includes setting up of the project, idea validation, govt liasoning, loan syndication etc. We have thorough experience of applying and claiming various government subsidies for MSME, Agriculture Units, Large Units, Industrial Undertakings, Textile Units etc. If you are planning to start new manufacturing business anywhere in Gujarat, then fill free to consult us before starting the activities. We will carefully review the project and we will design best suitable financial plan that reduce your capital cost and claim available govt. benefits.