Traders’ body Federation of All India Vyapar Mandal (FAIVM) along with associations in Chennai and West Bengal are likely to move the High Courts of Madras, Calcutta and Gujarat next week against the new clause introduced under Section 43B(h) of the Income Tax Act, giving teeth to the 45-day payment rule for businesses to make timely payments to their micro and small enterprise (MSE) sellers to receive tax benefits.
The Supreme Court on May 06 had rejected a plea by FAIVM, Madras Merchants and Manufacturers Association, and the Confederation of West Bengal Trade Associations that sought an interim stay on the new provision or quashing it.
The apex court had directed the traders to approach the High Court instead to pursue any relief.
“We are abiding by the honourable Supreme Court’s decision of going to High Court by next week likely. We will be going to the Madras and Calcutta High Courts and also most likely the Gujarat High Court,” RK Gaur of CA firm Gaur & Associates on behalf of FAIVM told FE Aspire.
“We believe that if the provision cannot be revoked then the government should create a mechanism that pushes all types of buyers – MSMEs, large enterprises, traders and also those in the government to pay to businesses from whom they are buying goods within a certain time period,” he added.
The government in last year’s budget had proposed an amendment to Section 43B under the Income Tax Act to insert Clause (h) by the Finance Act of 2023 to address the issue of delayed payments faced by MSE sellers from their buyers.
The clause, effective from April 1, 2024, 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.
FAIVM believes that the amendment is a breach of the constitutional right of businesses to decide the payment terms between two parties (buyer-seller) involved in a transaction.
“I feel the honourable Supreme Court has not read our petition in the right sense. There might be a problem in our drafting but the move is a breach of our constitutional rights under Article 19 of the Constitution of India,” Jayendra Tanna, President, FAIVM told FE Aspire.
He explained: As a buyer, I have to pay the MSE seller within 45 days to be eligible for tax deductions because the MSE is registered with the MSME Ministry, but since traders are limited to priority sector lending benefits under the MSME definition, there is no mandate for our buyers to pay us in 45 days and be eligible for tax benefits.
“This means while we continue to make payments to our MSE sellers on time, the payment cycle with our buyers is often of more than 45 days and hence we are stuck this way leading to working capital issues. How would we pay MSEs on time when there is no fixed timeline for our payments from our buyers?”
Traders currently can apply for Udyam registration under the MSME Ministry to only seek bank credit under priority sector lending guidelines. Hence, the new clause h under Section 43B is not applicable for payment outstanding to them from their buyers.
While traders can seek tax deduction next year by clearing MSE dues in case they are unable to pay within the stipulated time in the previous year from the invoice date, they would have to pay compound interest, in terms of penalty, with the monthly rests to the MSE on the amount at 3x of the bank rate notified by the Reserve Bank of India.
“While we can get the deduction the next year for not paying MSE on time in the current year, in the current year we will have to pay the interest and taxes also. Where will I get the money from?” said Tanna.
Based on the inputs from certain associations highlighting their concerns with the amendment, the government is considering the request to see if there is any scope of the amendment to the clause so that the credit cycle of MSEs is not disturbed and those not aware of the change get ample time to avoid any probability of liabilities, a source in the know had told FE Aspire in February this year.
In February, the Clothing Manufacturers Association of India (CMAI), the industry body for clothing manufacturers, had also urged the government to extend the time limit for receiving payments from buyers to a maximum period of 90 days by March 31, 2025 and 60 days by March 31, 2026 before reducing it to 45 days by March 31, 2027.
Traders’ body CAIT had also appealed to the government to postpone the implementation from April 1, 2024, to April 1, 2025, to provide traders with a one-year deferral period.