Credit and finance for MSMEs: Addressing the delayed payment crisis faced by micro and small enterprises — among the biggest challenges to their growth — the budget 2023-24 proposed to amend section 43B of the Income Tax act with a new clause (h) in order to include payments made to such enterprises. The section will provide for any sum paid by the assessee (buyer) to MSEs beyond the 45-day time limit (specified in section 15 of the MSME Development Act) will be allowed as deduction only when the payment is actually made to MSEs.
The budget presentation said, “In order to promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Act. Thus, deduction for such payments would be allowed only when actually paid. It will be allowed on accrual basis only if the payment is within the time mandated under the Micro, Small and Medium Enterprises Development Act.”
“This is expected to end the delayed payment menace finally,” Rajiv Chawla, Chairman of MSME association IamSMEofIndia told FE Aspire.
Also read: Budget 2023: 7 key MSME-related announcements made by finance minister Nirmala Sitharaman
Chawla explained that the onus will be now on the buyer to pay MSMEs on time otherwise he or she will have to reverse the GST input credit while the amount they pay to MSEs would be disallowed as an expense and hence, they would be liable to pay income tax on it.
“The government is giving all such buyers who don’t pay MSMEs on time to amend their attitude towards MSME payments. Moreover, this move of amending section 45B will not have any financial implication on the government as well,” Chawla added.
“It is an out-of-the-box solution to delayed payments problem faced by MSMEs,” Mukesh Mohan Gupta, President, CIMSME (MSME association) told FE Aspire.
Section 43B provides a list of expenses allowed as deduction under the head ‘Income from business and profession’ only in the year of actual payment instead of the year when it was incurred as an expense.
“This means buyers cannot claim a deduction without first paying MSMEs. It will force them to pay in time,” MSME association FISME said in a statement.
Importantly, delayed payment applications filed by micro and small enterprises against central public sector units and departments had dropped 11.7 per cent to 31,192 in the calendar year 2022 from 35,347 in 2021, according to the official data. The amount involved in these applications also dropped by 9 per cent from Rs 7,849 crore to Rs 7,128 crore. However, in comparison, 31,614 applications involving Rs 9,693 crore payment were filed by MSEs in 2020, indicating the Covid-induced impact on trade and transactions in 2021, as per the delayed payment monitoring portal Samadhaan’s data on MSME Dashboard.
Nonetheless, the number of applications disposed or cleared by MSE Facilitation Councils, which are essentially dispute settlement units established by state governments in their respective geographies to address delayed payments cases filed by small businesses, had declined in 2022, indicating lesser disputes resolved.
According to the data, out of the total applications filed, 1,056 applications involving dues worth Rs 71 crore were disposed by the councils across India in 2022 vis-a-vis 3,815 applications with Rs 580 crore cleared in 2021 and 6,232 applications involving Rs 1,500 crore cleared in 2020 by the councils.
The 2nd edition of FE Aspire’s SMExports Summit is here. Register now to book your seats!