Sop For Micro, Small Industries May End Up Strangling Them

In Union Budget 2023-24, Finance Minister Nirmala Sitharaman announced measures to promote registered micro and small enterprises. To ensure timely payment to these enterprises, it was proposed to include two provisions on payments made to such enterprises within the ambit of Section 43B of the Income Tax Act.

The first provision said if a firm which buys from a micro and small enterprises is unable to pay for goods or services within 45 days, it has to pay income tax due on that amount. The second provision said if any buyer pays after 45 days, he or it will need to pay interest on the outstanding amount for the duration over and above the stipulated 45 days credit limit.

The time limit of 45 days was set for deals in which there was no agreement between the buyer and the seller on when the payment will be made. In case of written agreements, it was understood that any buyer will make the payment on or before the date agreed upon with the supplier.

The amendments cover only micro and small enterprises which make up the bulk of Micro, Small and Medium Enterprises (MSME). The law doesn't cover medium enterprises, and there is no government set time limit for making payment to such enterprises. Even unregistered micro and small enterprises are out of the ambit of the amendments.

Will Affect Future Of Micro and Small Units

One serious implication is that big buyers, with greater financial muscle and negotiating capabilities, are turning away from micro and small units. Generally, big buyers ask for a longer period for payment and they have a longer payment cycle. In fact, medium enterprises provide them more elbow room for payment with longer duration. Experts believe the government's attempt to help micro and small enterprises by inserting new clauses will be detrimental to them in the long run.

“Enforcing a mandatory 15/45 days payment deadline across all businesses, without regard for their inherent operating cycles, poses the risk of disrupting cash flow dynamics, particularly for sectors where operational cycles extend beyond these time frames,’’ said Ajay Patel, President, Gujarat Chamber of Commerce and Industry.

“In industries with longer business cycles, exceeding 90 days at times, adhering to the proposed payment window becomes impractical and may impede the ability to meet timely payments to micro and small enterprises. A more nuanced approach that considers the diverse operational timelines within sectors would be conducive to sustaining a balanced and equitable payment framework,” Patel added.

Rampant Unrest Sets In Among Buyers

Though the rule came into effect last year, the unrest is becoming palpable among buyers. It is because if they fail to pay within the 45 days of delivery, they would not be able to claim deduction for the income tax paid for the micro and small industries order in the year the order was placed, but only when the payment is made. Such denial of deduction for unpaid outstanding will shoot up their taxable income and the resultant tax for this year.

Some traders are also raising objections within 15 days of delivery of goods/services as a ruse to defer payment since there can be no payment unless the ground of objection is resolved, buying them more time.

“This rule is draconian, the delay in payment to suppliers in the normal course of business can be for many reasons beyond the control of enterprises such as a lull in business, sales not picking up or lack of fund flow, non-receipt of payment from end-customers, etc.,” said Ved Jain, a former president, ICAI.

“The amendment, though stated to be in the interests of Micro and Small Enterprises, may lead to many business enterprises becoming sick or unviable,” Jain added.

MSMEs' Importance In The Economy

The share of MSME Gross Value Added (GVA) in India's GDP during 2019-20, 2020-21 and 2021-22 was 30.5 per cent, 27.2 per cent and 29.2 per cent, respectively, says data from the Ministry of Statistics & Programme Implementation. The share of MSME manufacturing output in all-India manufacturing output during 2019-20, 2020-21 and 2021-22 was 36.6 per cent, 36.9 per cent and 36.2 per cent respectively. Similarly, the share of exports of MSME specified products during 2020-21, 2021-22 and 2022-23 stood at 49.4 per cent, 45.0 per cent and 43.6 per cent, respectively. All three are falling.

The MSMEs provide employment to a large number of workers. There are 633.9 lakh MSMEs in India, of which 630.5 lakh enterprises come under the category of Micro-enterprises. There are a total 3.3 lakh Small enterprises and just 5,000 Medium businesses.

Will Concerns Be Addressed?

Traders, buyers and other stakeholders from all over India have made a large number of representations to the Finance Ministry. The government has not given a definitive response. Officials said the government is looking into the concerns raised by businessmen.

The government reiterated that a lot of deliberations were done before introducing the provisions, hence there is little chance to change the amendments made. “The welfare of small and medium enterprises were kept in mind while amendments to the laws were made. Payment to micro and small units were always an issue that affected their business. The hue and cry over this now is out of proportion. Moreover, there is a provision of deduction, if somebody has paid more money, he can always claim a deduction,” said MSME expert Rajeev Chawla.

India’s target of becoming a US $ 7 trillion economy by 2030 would be significantly dented if micro and small enterprises that employ the largest number of people, end up unintentionally suffering from "government's benevolent policy".