The Challenges faced by the Indian Service Sector Enterprises

Vaishnavi Gupta
Vaishnavi Gupta Sep 21 2020 - 5 min read
The Challenges faced by the Indian Service Sector Enterprises
At a time of crisis when the sector was in dire need of special focus and customized solutions by the government, they have been merged with and lost amidst the pool of Medium, Small and Micro Units re-assessment of business, based on turnover.

The Indian Service Sector Enterprise is a rarely spoken of the segment, although it comprises of some of the most significant sectors of the Indian economy. These include the Travel and Hospitality, Beauty and Wellness, Healthcare, Finance, Business, Real Estate, Transport, and Logistics, as well as technology and communication service providers, most of which fall under the SME/MSME and Start-up segment. The easy access to modern technology enablers has further accelerated the growth of service focussed businesses.

As a sector that brings a considerable amount of FDI and employs 31.45% of India’s employed population (as of 2018), the services sector is said to contribute 55.39% to India’s Gross Value Added (GVA) at the current price in FY20. However, the recent pandemic and the resultant lockdown have lent a major blow to the SME/ MSME and start-up businesses, and more so for the service-focused enterprises. While the new ‘Atmanirbhar Bharat Abhiyaan’, FM Nirmala Sitharaman has announced a lucrative package of INR 20 Lakh Crore, the initiative has also re-defined the MSME segment parameters and merged the manufacturing and service sectors into terms based on turnover, namely as ‘Micro Units’ for less than INR 5 Cr. Turnover, ‘Small Units’ for less than INR 50 Cr. Turnover and ‘Medium Units’ for less than INR 100 Cr. Turnover.

This merging of enterprises and the re-assignment of businesses based on turnovers, has further made it difficult for service sector enterprises to leverage the benefits of the economic bail-out package, as the specific challenges and needs of the sector continue to go unnoticed, and even maybe lost as they try to compete for attention on an unequal playing field. At a time of crisis when the sector was in dire need of special focus and customized solutions by the government, they have been merged with and lost amidst the pool of Medium, Small, and Micro Units re-assessment of business, based on turnover. This needs to change, especially because of the following key differentiators of the service sector enterprises:

It’s a Perception Driven Industry

In contrast to the tangible ‘products’ that are the center of the business for manufacturing and trade, the service sector enterprises often work on the subjective, intangible aspects that drive customer satisfaction. This makes it an extremely perception and image-driven business, where effective customer engagement is vital to survival. The COVID-19 pandemic and the lockdown has completely hindered the customer experience interface, pushing it completely to the digital domain. Now, while the manufacturing and trade sectors can continue to function by relying on excess inventory, the impact on business for service sector enterprises is immediate! More so, with the COVID scare, it is also a sector that might take longer than normal to get back to business, considering a lot of services do not necessarily fall under the essentials list!

People-Centric and Moresusceptible to crisis

Being a people-centric sector, the service enterprises are in a much larger loss, with the lockdown restricting the movement of staff. Further, the health crisis directly impacts service levels, customer footfalls, and thus inflow of finances. This also reflects on the sustainability and long term strength of the business, as this sector, which otherwise sees a stable workforce, tends to lose a lot of good human resources during a crisis.

Both of the above factors are unique challenges that put the service sector enterprises at a distinctly different level of survival requirements. A well thought out approach with special attention to financial support and benefits directed specifically to this segment is the need of the hour! These include:  

Faster Access to loans

It is a misconception that the service sector enterprises are not as investment incentives, like the manufacturing and trade segment. This is an inaccurate assumption, especially in today’s economy where there is a heavy reliance on technology, upskilling of people, regular training and up-gradation of systems and processes that are required to stay relevant, in times of tough competition. Further, unlike the manufacturing sector that requires heavy investments in property, machinery, and set-up, the service sector enterprises' lack of tangible assets also hampers the loan credibility of many companies. Creditors, mainly banks and financial institutions, are hesitant on providing loans due to the lack of a clear ROI which manufacturing or a trading sector can easily provide. Even in recent times, in the schemes and packages announced by the government, the service sector has been put aside and has not been given due diligence. Hence, while the manufacturing and trade sector enterprises tend to benefit from faster and easier loans, the service sector enterprises too need to have access to platforms and financial organizations that can fast-track the approvals for their loan requirements.

Tax holidays

The service sector has traditionally been one of the most tax heavy sectors, with multiple direct and indirect taxes, import duties, luxury taxes, etc. This also makes it one of the largest contributors to the Indian GDP. However, while the re-alignment of SME/MSMSE businesses based on turnovers, has technically made the service sector a part of the larger pool to enable them to leverage the government relief packages, there is no mention of tax holidays for them. Service sector enterprises currently fall under the highest GST bracket of 18%-20% while the manufacturing sector tends to enjoy GST across the spectrum of 1—15%, while also enjoying tax holidays in specific sectors related to agro-tech or specialized, essential manufacturing. No such considerations have been made available for the service sector, although they remain equally, if not more affected by the crisis than the manufacturing sector.

Being such a big contributor to the Indian GDP, a major source of FDI, and one of the prominent employment generators in the country, the Service Sector Enterprises deserve not only a separate mention and definition but also a separate set of relief package, which can allow them to sustain.


This article is written by Anindita Gupta, Co-Founder of Scenic Communication.

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