According to estimates a whopping Rs 10.7 lakh crores – is locked up in delayed payments from buyers to suppliers in the Indian economy – an estimated 7.8 per cent of the GDP, with 80 per cent of this estimated amount owed to micro and small enterprises, totalling Rs 8.55 lakh crore. The government and RBI have initiated several measures to address this problem.

Government measures to address the delayed payments to MSEs

The Finance Act 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro and Small enterprises (MSEs) for goods supplied or services given may be deducted in the same year if it is paid within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

The newly added clause (h) states that any sum payable by the assessee to a Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed).

Micro Enterprises, means an entity having an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, should invest in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores.

This newly added clause (h) is applicable when an enterprise is buying goods or taking services from a micro and small enterprise registered under the MSMED Act, 2006. In other words, this clause is not applicable to a trading enterprise (i.e., micro & small enterprise engaged in trading activity) registered under the MSMED Act, 2006 which is a seller.

Section 43B Clause (h) is operative from April 1, 2024 and will accordingly apply in relation to the assessment year 2024-25 (i.e., FY 2023-24) and subsequent assessment years.

Business enterprises are required to pay the dues of Micro & Small enterprises within 45 days (i.e., In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days) as per section 15 of the MSMED Act, 2006. In case there is no written agreement, payment should be made within 15 days.

In the case of late payment to an MSE, Compound interest at the 3 times the bank rate notified by the Reserve Bank of India (RBI) is charged and payable by the buyer. Such interest is payable from the date as per the agreement or the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier (appointed day), as the case may be.

The deduction of this interest so charged as above is not allowed as an expense, as per the Income-tax Act (ITA), 1961. Companies who procure the goods and services from MSEs but have not settled their payment dues to MSEs within 45 days from the date of acceptance, have to submit a half yearly return to MCA stating the amount of payments due to MSEs and the reasons for the delay.

Needless to mention that the above stringent rules are laid down in order to ensure the timely payment to the sellers of goods and services (who happen to be micro and small enterprises) so that they do not face working capital issues. However, this has become counterproductive with unintended consequences as the micro and small enterprises are getting their sale orders cancelled by the buyers where majority of them happen to be large corporates.

Under the Public Procurement Policy for MSEs under section 11 of MSMED Act, 2006, Every Central Ministry /Department / PSUs shall set an annual target for 25% procurement from MSE Sector (with sub targets for micro and small enterprises owned by women and SC/ST entrepreneurs). The union government has also set up a delayed payment monitoring portal MSME Samadhaan, for the payments due to MSMEs by the government for its procurement from MSMEs.

Status of delayed payments notified by MSEs and disposed by the Ministry of Micro, Small & Medium Enterprises, under MSME Samadhaan, as on 16.5.2024.
Applications filed by MSEs 1,90,149
Applications mutually settled 17,533
Applications yet to be viewed by MSEFC Council 48,384
Applications rejected by MSEFC Council 49,087
Cases disposed by MSEFC Council 36,188
Cases currently under consideration by MSEFC 38,957
Cases filed with MSEFC after 30.10.2017 (i.e., after launch of MSME Samadhaan) 75,145
Amount payable (INR Crs) 23,202.39
Cases disposed 36,188
Amount involved in disposed cases (INR Crs) 6,249.87

But the fact remains that many MSMEs do not file delayed payments applications for obvious reasons. The fact also remains that the delayed payments to the MSMEs are very large from the government sector.
Role of MSMEs in Indian economy
Share of MSME Gross Value Added (GVA) in India’s GDP is 29.15% in 2021-22.
Share of MSME manufacturing GVA in India’s manufacturing GVA is 40.83% in 2021-22.
Share of export of MSME related products in the overall exports is 43.59% in 2022-23.
As on 06.12.2023, the total employment recorded on the Udyam Registration Portal (since inception 01.07.2020 to 06.12.2023) is 15.50 crore.

According to U K Sinha Committee Report in 2019, the demand for credit in the MSME Sector is around Rs.20- 25 lakh crore. It can also be easily inferred that a significant portion of credit is still being availed by MSMEs (particularly Micro and Small enterprises) from unorganised sectors like private financers and money lenders.
Ripples created by section 43 b(h) of the Income Tax Act, 1961.

As mentioned earlier, section 43 b(h) of the Income Tax Act, which was expected to support the MSEs in getting the payments from their buyers promptly within the stipulated period of 45 days has ended up being counterproductive. Thousands of small businesses claim that new orders from bigger customers have dried up since the rule took effect on April 1. The business has started to flow from the registered entities to the unregistered ones because that allows the buyer to avoid the payment deadline.

Many bigger customers who buy the goods and services from MSEs have declined to place orders with them, thereby compelling those MSEs to cancel their MSE registration so that the provisions of section 43 b(h) of the Income Tax Act are not applicable for such bigger customers while procuring the goods and services from those MSEs.

According to a CNBC Awaaz report, more than 40,000 Indian small businesses (12,000 in Gujarat alone), have cancelled their registration and approached the Supreme Court with an appeal to remove the mandated rule to clear payments within 45 days. However, on 6th May, 2024 the Supreme Court declined to entertain their petition and has advised them to approach High Court.
It is learnt that the finance ministry is looking into a proposal to tweak the new income tax rule under which business enterprises will be required to make payments to micro and small enterprises (MSEs) within 45 days. Some businesses have sought deferment of the provision by a full financial year.

The RBI launched the Trade Receivables Discounting System in 2018. In line with this, The Trade Receivables Discounting System popularly known as TReDS, an online platform is created that allows MSME suppliers to discount their bills and invoices raised against major corporations, which helps them manage their working capital demands.

Transactions processed under TReDS will be “without recourse” to the MSMEs meaning that MSME vendors need not be responsible for non-payment of the trade receivables amount (from buyers). In 2018, the Government made it mandatory for all companies with a turnover greater than Rs.500 crores to register with TReDS in addition to all central Public Sector Undertakings (CPSUs). MSME Ministry is considering to reduce the minimum threshold limit of the turnover of the companies from Rs. 500 Crs to Rs.250 Crs who buy their goods and services from MSMEs to register with TReDS.

In addition to this, the author suggests the following measures:

While discounting the trade receivables under TReDS the interest expense up to the period of 45 days from the date of the invoice may be borne by either the MSE supplier or the corporate buyer but the interest expense for the period beyond 45 days from the date of invoice to be borne only by the corporate buyer and the same should be disallowed for the computation of the corporate tax.

Corporates with the turnover of Rs. 250 Crs and above whose annual procurement of the goods from MSEs is more than 10 percent of their overall annual procurement may be given suitable rax rebates, provided the payment for such procurement is made within 45 days. This will certainly encourage the large corporates to buy from MSEs for their procurement needs. This measure will also address the twin issues of (i) the compulsion of MSEs to cancel their registrations and (ii) mounting delayed payments by the buyers of the goods and services from MSE suppliers.

Reference:

1. https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx.
2. (https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_CategoryAmtAge_Rpt.aspx)
3. https://msme.gov.in/public-procurement-policy.
4. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=112834#:~:text=The%20Government%20has%20issued%20directions%20under%20the%20Public,services%20from%20Micro%20and%20Small%20Enterprises%20%28MSEs%29%20units.
5. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=194967.