By Pushan Sharma and Elizabeth Master
Credit and Finance for MSMEs: The budget 2023 has delivered a clever solution to the persistent issue of delayed payments faced by micro, small and medium enterprises (MSMEs) in the country.
To ensure timely payments to MSMEs, the government will now allow expense deduction by the buyers only when payments are made. Indeed, a company can claim deduction on an expense only if it has paid the supplier against that expense.
Earlier, the government allowed deduction against an expense that was recognised as and when revenue got recognised, even though creditors had not been actually paid.
This isn’t the government’s maiden effort to solve the problem of delayed dues faced by the 630 lakh-odd MSMEs in the country, which account for a third of gross domestic product (GDP), half of the country’s exports, and employs almost 11.10 crore workforce.
In October 2017, it had launched the MSME Samadhan scheme under which MSMEs that faced more than 45 days’ delay in payment could approach Micro and Small Enterprises Facilitation Councils (MSEFCs) in their state to fast-track the settlement of dues.
However, the scheme has not shown remarkable success. So far, only 10 per cent of the cases presented have been mutually settled between the MSME and MSEFC.
As on February 1, Rs 18,216 crore is pending as shown on the MSME Samadhan portal. This is only a fraction of the total payment stuck, as most MSMEs don’t log their cases on the portal since their contracts are often verbal, minus proper documents.
The ineffectiveness of the Samadhan scheme is due to four reasons.
First, absence of the buyer at the council hearings, which leads to rescheduling of the case, as there is no penalty for doing so.
Second, the fact that MSMEs often don’t file a case as their bargaining power is low and they probably don’t want to lose a buyer.
Third, the process is arduous, as it takes nearly two months for the first hearing, and thereafter two months to settle the dues between buyer and seller.
And fourth, even if the hearing is ruled in the favour of the MSME, they have to approach the civil court to collect the due, which, again, is a lengthy process.
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Therefore, the new expense deduction measure is in the right direction, though how the proposal actually unfolds remains to be seen.
In addition to this, retooling the Samadhan portal can also help. For instance, standard contracts can be introduced, the verification process can be automated, and an awareness campaign on the same should run at the state-level.
Pushan Sharma is Director of Research and Elizabeth Master is Associate Director – Research at CRISIL Market Intelligence and Analytics. Views expressed are the author’s own.