Delayed Payments, Lack of Formal Financing in MSMEs Affect Job Creation

February 15, 2024
Delaying in Payment

By Rupin Chopra and Apalka Bareja

Introduction

India’s Micro, Small and Medium Enterprises (MSME) are the backbone of the economy, contributing significantly to employment and GDP. The government in order to show their support has formulated and implemented various policies for the development of the MSME sector. With belief that strengthening the MSME sector is strengthening the entire society, the government has made changes to improve and smooth out the duty framework with respect to the delayed payments that have been for long plaguing this sector and hindering growth and financial stability. According to a report by the Global Alliance for Mass Entrepreneurship, around INR 10.7 lakh crore face delayed payments from buyers to MSME suppliers.[1] The government’s recent tax rule changes, aimed at addressing this issue have raised concerns around their effectiveness and potential unintended consequences.

45 Day Payment Rule

At the heart of the debate lies Section 43B (h) of the Income Tax Act, introduced in the 2023 Fnance Act. This provision mandates that the buyers must settle payments to registered MSMEs within 45 days of delivery of goods or services rendered. Crucially, any outstanding amount after the stipulated timeframe is treated as income for the buyer, subject to taxation. This provision aims to improve cash flow for MSMEs, potentially boosting their financial health and growth.

Impact on MSME Payments

This rule aims to address the chronic issue of delayed payments to MSMEs, a major hurdle to their growth and financial stability. By incentivizing timely payments through tax implications, the rule has the potential to:

  1. Improve cash flow: Faster access to payments translates to improved working capital, reducing dependence on loans and enabling investments in expansion.
  2. Reduce disputes: Clear deadlines and tax consequences encourage timely invoice processing and discourage delayed payments, leading to fewer disputes and improved business relationships.
  3. Boost financial health: Timely payments contribute to a healthier financial ecosystem for MSMEs, fostering growth and sustainability.

Challenges and Concerns

However, the implementation of Section 43B(h) presents several challenges:

  1. Disruption in established credit periods: Industries with longer credit cycles, like textiles, are facing disruption as buyers adjust to the new rule, potentially leading to order cancellations and supply chain disruptions.
  2. Compliance burden: Both MSMEs and buyers need to adapt their systems and processes to ensure compliance. MSMEs may require upgrades to accounting and invoice tracking software, while buyers need efficient invoice processing mechanisms.
  3. Unintended consequences: The rule might incentivize buyers to avoid engaging with MSMEs altogether, fearing potential tax implications of delayed payments.

Conclusion

Section 43B(h) holds the potential to improve the financial health of MSMEs, but a cautious approach is necessary to navigate the challenges and ensure the rule benefits all stakeholders. Open communication, industry consultations, and flexible implementation are key to achieving a win-win situation for MSMEs and the Indian economy.

[1] https://massentrepreneurship.org/wp-content/uploads/2022/06/Delayed-Payments-Report.pdf

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