The government will likely put in abeyance implementation of a new law that seeks to ensure time-bound payments to micro and small enterprises (MSEs) by linking it to tax reliefs.
According to a clause introduced in Income Tax Act via Finance Act 2023, firms were required to make payments to to MSEs within 45 days of purchases, to get tax deductions on such payments.
While the plan, which was to be effective from April 1, has now been frozen, a final call would be taken in the regular Budget in July, a source said.
The clause was aimed to enable the small firms, which were facing a crisis, to maintain uninterrupted cash flows. However, a review was necessitated, following representation from sections of MSEs and traders on the difficulties faced by them as well as lack of clarity.
Under Section 43B of the Income Tax Act, deduction on expenditure on an accrual basis is permitted for the previous year if the payment has been made before the due date of filing of return of income by a firm in the subsequent year.
However, the clause (h) under the section inserted through Finance Act 2023 states that deduction is on payment and not on the accrual basis subject to the time limits specified in Section 15 of the MSME Act, which are 45 days in case of contract and 15 days in case of no written contract. The clause was to be applicable from April 1, 2024.
Where the amount outstanding at year-end is paid next year beyond the time allowed in the MSME Act, such amount would be disallowed while computing the business income for the current financial year 2023-24, according the clause. The deduction would be allowed in 2023-24 even if paid after March 31 if complies with the 45-day time limit.
While the provision aims to enhance financial liquidity for MSEs, the Confederation of All India Traders (CAIT) General Secretary Praveen Khandelwal in his recent meeting with finance minister Nirmala Sitharaman said there was a lack of clarity surrounding the applicability of the law to traders and other related provisions. CAIT also called for the suspension of its implementation until sufficient clarification and information dissemination are achieved nationwide.
Since the section is applicable for payments to MSEs only and not to payments made to medium enterprises, there was apprehension that this would affect the business of MSEs adversely as the industry will prefer to work with medium enterprises and larger ones.
“This is a stringent deadline (15/45 days) for payment to micro and small entities (MSEs) which in turn can lead large businesses to do business with medium suppliers as an alternate,” said Yeeshu Sehgal, Head of Tax Market, AKM Global, a tax and consulting firm.
“Hence, in view of the same and considering the sentiments of the market, MSMEs may want this new provision to be deferred for a certain point of time. There may be also some businesses which suffer from inherent long payment cycles as well,” Sehgal said.
The government’s renewed focus on MSMEs stems from the recognition of the fact that such units require a protracted period of succour to leave the pandemic scars behind and cope better with the risks of depleting export order flows. MSMEs account for about 40% of the country’s exports, 6% of the manufacturing GDP and almost 25% of the services GDP.
The latest TransUnion CIBIL-SIDBI MSME Pulse Report said sustained credit supply has enabled substantial portfolio growth of 11% amounting to Rs 28.2 trillion across 80 Lakh MSME entities in the July-September 2023 quarter.