The amount involved in complaints filed by micro and small enterprises (MSEs) against delay in payments by their buyers has crossed Rs 50,000 crore. According to the official data, aggrieved MSEs have filed 2.31 lakh complaints so far since October 2017 to recover Rs 50,359 crore in unpaid dues by companies that purchased their goods and services.
The amount unpaid has grown 20 per cent from around Rs 41,900 crore as of March last year, as despite efforts by the government, the issue shows no signs of fading, straining the working capital cycles of MSEs.
For the resolution rate, data from the delayed payment monitoring system of the MSME Ministry – Samadhaan, launched in October 2017 to help MSEs file complaints against buyers defaulting on payments, showed a troubling picture. Of the total applications filed, only 46,892 cases involving Rs 7,634 crore have been disposed by the facilitation councils.
Facilitation councils are dispute resolution entities set up by state governments under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The councils function as arbitrators or conciliators to settle disputes.
Another over 57,000 cases involving Rs 8,717 crore in delayed payments are still pending review by councils, reflecting the systemic enforcement gap in implementing the payment timelines stipulated under the MSMED Act, which requires buyers to clear dues within 45 days.
According to the data, while the number of applications mutually settled between buyer and seller has jumped to 21,598 involving 2,640 crore, those rejected by councils have increased to 63,953 amounting to Rs 12,638 crore from 46,438 applications involving Rs 9,218 crore rejected till May last year.
Delay in clearing payments to MSEs not only hurts their financial viability but also limits their capacity to innovate and plan for long-term growth. Since a large number of MSMEs operate with limited access to formal credit, delay in getting their payments has a direct bearing on their ability to pay employee salaries, purchase raw materials, or service loans.
Moreover, for micro and small manufacturers and service providers, who rely on public sector contracts or large enterprises, the asymmetry in bargaining power hampers the recovery of dues. Also, many MSEs often refrain from pursuing legal remedies due to concerns over damaging business relationships and eventually losing revenue.
To address this issue, the government had last year brought into effect a new clause h under Section 43B of the Income Tax Act that disallows expenses to buyers on invoices from MSEs unless paid within 45 days (where agreement exists) and within 15 days if there is no agreement.
In January 2019, the government had launched a half-yearly MSME return form or MSME-1 form for buyers, who haven’t settled dues beyond 45 days, citing the reason for the delay and the amount due. Failure to file the form invites a penalty of Rs 20,000 by the company and every person involved in default. Subsequent failures lead to Rs 1,000 per day and up to Rs 3 lakh.