– By Bhavin Kapadia and Neha Inani
Our nation is shining as a bright star in the world as described by our honourable finance minister in her budget speech. The ecology of the developing country depends on contribution from all corners and sectors to advance significantly. Small entrepreneurs are provided protection rights and a booster dose with an aim of promoting innovation and comprehensive upliftment. The threshold limits for classifying and registering as micro, small and medium enterprises have gradually increased to expand the base of MSME and the current limits are as tabulated below:
|Criteria||Micro enterprises||Small enterprises||Medium enterprises|
|Investment in Plant & Machinery or Equipment||Less than or equal to INR 1 crore||Less than or equal to INR 10 crores||Less than or equal to INR 50 crores|
|Annual Turnover||Less than or equal to INR 5 crores||Less than or equal to INR 50 crores||Less than or equal to INR 250 crores|
Advantages given to MSME
To vitalize and guard such entrepreneurs, extended support is given in the form of entitlement to cash credit facility with lower interest rate, collateral free bank credit, waiver from issuing earnest security deposit against tender, channel financing without recourse on such enterprises and raising the threshold limits for obtaining GST registration. Further, in the recent Finance Bill, it is also proposed to increase the threshold limit for paying income tax on presumptive basis (i.e. computing taxable profit at fixed % of the turnover) without maintaining their books of account.
Concerns of MSME
Key concerns raised by the fraternity of micro, small and medium entrepreneurs comprise of competition from large entrepreneurs in terms of pricing and discounts, long credit period demanded by the customers, branding, inadequate resources for advertising and managing cash flows for day-to-day operations.
Measures taken by the government to address or mitigate the concerns
To address these concerns, the government had enacted MSME Act, 2006 which mandates that payments should be made to micro and small entrepreneurs in the stipulated timeline of 15 days and not beyond 45 days from the day of acceptance. In case the party defaults or delays the payment, then micro and small enterprises are entitled to receive interest at 3 times of bank rate computed on compounded interest with monthly rest. Income tax law prohibits certain deductions to be claimed as expenses like expenses incurred on Corporate Social Responsibility, the same treatment is also given for interest payable to micro and small parties.
To further implement this law, entities who have undertaken business transactions with MSME parties are directed to disclose in their annual financial statement the aggregate amounts due to micro and small parties, overdue amounts, interest liability paid thereon and outstanding interest. Additionally, corporate entities are required to file half yearly forms with MCA regarding overdue outstanding payables to micro and small enterprises.
New initiative proposed in the Finance Bill – ‘Pay on time or penalize’
Inspite of such measures taken by the Government to safeguard the interest of micro and small enterprises, payments were not released to them on timely basis. The payments were kept on hold due to retention / defect liability period and interest liability was accumulated / adjusted in pricing.
As per the Income tax law, there are certain amounts which are allowed as expense deduction only on actual payment basis and not on accrual basis like indirect taxes collected / deducted, staff related leave encashment and statutory bonus. With the spotlight on MSME, Finance Bill 2023 has proposed that expense incurred and payable to micro and small vendors will be allowed for computing tax profit only on actual payment to such parties, i.e., unpaid amount to micro and small parties will be disallowed and income tax benefit will not be available. This amendment is proposed to be effective from financial year 2023-2024. This is a welcome move from the perspective of micro and small parties which will enable liquidity in their hands and improved debtor turnover ratio.
Implication on the business dealing with MSME
This proposed change in income tax law will have significant repercussions on the counter party considering its impact on tax outflow. Further, it is applicable to all business enterprises irrespective of the legal structure being corporate or non-corporate enterprises. It also does not carve out transactions between two parties which are micro and small. With the proposed change in tax law and considering the better governance of abiding the Law of Land, business enterprises need to relook at the commercial terms agreed upon with the micro and small parties and ensure strict internal controls on timely payments to such vendors. In-order to inculcate this system, it is advised to conduct periodic open house sessions for compliance of the law in the right spirit.
Awaiting clarifications from Income Tax on the proposed law of pay or penalize
There are certain matters which are unclear at this stage and stakeholders are expecting the Income Tax department to issue a FAQ to avoid ambiguity in the legal position. Some of the areas which are deliberated are implication of unpaid outstanding liabilities to micro and small parties as on 1st April 2023, applicability of such provision to purchase of capital items and disputed matters with parties under litigation.
Best efforts are made by the Government to strengthen the arm of MSME sector and business enterprises are expected to support the same. To leverage such benefits and acknowledge the initiate taken the Government, MSME parties should also take self-initiative to improve their efficiency, delivery timelines, quality factors and overall use of technology which will make them the ‘First Preferred Vendor’ and becoming a partner in the value chain rather than just recognize as a supplier of good or services.
(Bhavin Kapadia is the Partner and Neha Inani is Qualified Associate at NA Shah Associates.)