INTRODUCTION
India is a developing economy and as a result, small enterprises play a vital role in its growth. Developing small-sized enterprises leads to growth in GDP, generates employment and increases exports. MSMEs contribute more than 29% to the GDP, nearly about 50% to total exports and are responsible for one-third of manufacturing output. It also employs nearly 11 crore people.[1] MSMEs usually operate in tier-2 and tier-3 cities which leads to regional development. As a result, encouraging and supporting MSMEs becomes important.
MSME stands for micro, small and medium enterprises and is regulated by the Ministry of Micro, Small and Medium Enterprises under the MSMEs Development Act, 2006.[2] MSMEs are categorized into ‘Micro’, ‘Small’ and ‘Medium’ enterprises as per section 7 (1) of the MSMED Act, 2006[3]and are further bifurcated into two classes that are ‘Manufacturing Enterprises’ and ‘Service Enterprises’.[4]
MSMEs are small-sized enterprises and as a result, require less amount of capital and resources to operate. But for a long time now MSMEs have been facing the problem of delayed payment which is proving to be a major obstacle in the production process. Taking this difficult situation into consideration the Finance Act 2023 [5] proposed to insert clause(h) in section 43B of the Income Tax Act, 1961 [6] to deal with this problem of delayed payment.
PROBLEM OF DELAYED PAYMENT
MSMEs function according to the provisions of the MSMED Act, 2006. In this act, there are provisions given regarding due dates and delayed payments. Chapter V (that is from section 15 to section 25) of the MSMED Act,2006 [7] deals with delayed payments to micro and small enterprises. Section 15 of the MSMED Act, 2006 [8] deals with the date of payment based on whether the agreement is written or not. The time limit is 15 days and if there is a written agreement then it can be extended to 45 days (but not beyond that). If the buyer fails to comply with the conditions mentioned in section 15 of the MSMED Act, 2006 then the buyer will be liable to pay the amount of interest as mentioned in section 16 of the MSMED Act, 2006.[9] However, these sections do not force the supplier to make the payment.
MSEs (micro and small enterprises) of every sector are facing this problem of delayed payment. Pharma MSEs are also facing the problem of delayed payment making them unable to compete effectively in the market when compared to the large size companies. Furthermore, MSEs in this sector are vulnerable as they lack negotiation power making them an easy target for buyers to exploit. [10]
The problem of delayed payment has a drastic impact on the economy of the nation. It has affected the formal financing as well as the employment generation ability of the country. Near about 10.7-lakh crore is stuck in delayed payment to MSMEs (suppliers) from the buyers.[11]
‘MSME SAMADHAAN’ is a delayed payment monitoring system established under the MSMED Act, 2006 where MSEs can file online applications about delayed payments. There are nearly about 1.78lakh applications filed by MSEs against delayed payments.[12] And these are just the number of complaints field. Multiple enterprises don’t even file complaints from the fear of larger enterprises. Some enterprises don’t report delayed payment because they are afraid, they would lose the buyer.
MSMEs are enterprises with limited capital and when buyers fail to make the payments on time it becomes difficult for these enterprises to continue the process of production. The MSME sector has the potential to change the condition of the Indian economy but to be able to pull that off this sector needs a proper flow of capital to operate. The problem of delayed payment disrupts the smooth flow of capital and reduces the efficiency of these enterprises.
SECTION 43B CLAUSE(h) OF INCOME TAX ACT, 1961
To promote timely payment and to make buyers comply with the provisions of section 15 of the MSMED Act, 2006 a new income tax regulation was proposed by Finance Act, 2023. This act proposed to insert a new clause in section 43B of the Income Tax Act, 1961 which links the deduction of tax with timely payment to MSME. This linking will force the buyer to settle the due payment on time.[13] This new clause is likely to come into effect from April 1, 2024.
Clause (h) states that any buyer who hasn’t settled the sum payable to small and micro enterprises within the time limit prescribed in section 15 of MSMED Act, 2006 that is not more then15 days, and if there exists a written agreement then not more than 45days, will not be able to claim the tax deduction. The deduction will be allowed only on the actual payment of the sum payable. [14]
This clause will act as a binding on the buyers to make timely payments because if the buyer fails to settle the sum payable to MSE then it won’t be able to claim the deduction and as a result, there would be an increase in taxable income and in the amount of tax payable of the buyer in that particular financial year.
IMPACT OF CLAUSE (h) ON MSME’s AND OTHER SECTORS
MSME being a significant growing sector of our economy has a lot of scope for development. The introduction of clause (h) will clear hindrances in the path of their development and MSMEs will be able to function at maximum efficiency. Clause (h) will make sure that the flow of capital is not disrupted as buyers are a major source of capital for MSMEs and their timely payment will ensure a smooth flow of capital as well as goods and services. This clause will solve the max financial problems of MSME’s. A good, stable and growing MSME sector will be able to contribute more to GDP and will be able to generate more employment.
This clause has a very positive impact on MSMEs and the whole economy at large. But it is proving to be a matter of concern for some sectors of the economy. Many industries depend on intra-sector credit as a source of finance. For example, the garment industry. It is a large and extremely fragmented industry that relies heavily on intra-sector for financial support. After clause (h) comes into effect these industries will face a huge financial problem. As a result, they are requesting for the postponement of the clause(h).[15]
CONCLUSION
MSMEs are a major part of a developing economy and hence encouraging them to grow is very important. Along with encouragement needs protection from exploitation and that’s the role that clause (h) plays. It protects MSE. The finance ministry is considering the requests from other industries about postponing the date to 1 April 2025. But sooner or later it will come into effect and after that, MSMEs will be able to grow without any speed breakers. MSMEs are directly related to the economy of the country so if one advances so will the other. The success or failure of clause (h) will have a drastic impact on the future of MSMEs and also on the future of the Indian economy.
Author(s) Name: Riya Vinay Doshi (Savitribai Phule Pune University)
Reference(s):
[1]‘MSMEs and Their Impact on the Indian Economy’(Bajajfinserv, 14 September 2023) <https://www.bajajfinserv.in/what-is-msme-and-impact-on-the-indian-economy#:~:text=How%20do%20MSMEs%20contribute%20to,third%20of%20India’s%20manufacturing%20output.> accessed 10 March 2024
[2] Micro, Small and Medium Enterprises Development Act 2006
[3] Micro, Small and Medium Enterprises Development Act 2006, s 7(1)
[4] ‘What are Micro, Small and Medium Enterprises?’, Ministry of Micro, Small and Medium Enterprises <DC-MSME (dcmsme.gov.in)>
[5] Finance Act 2023
[6] Income Tax Act 1961, s 43 B(h)
[7] Micro, Small and Medium Enterprises Development Act 2006, Chapter V
[8] Micro, Small and Medium Enterprises Development Act 2006, s 15
[9] Micro, Small and Medium Enterprises Development Act 2006, s 16
[10] EP News Bureau, ‘Delayed Payments to Pharma MSMEs: A Major Challenge’ (Express Pharma, 16 August 2023) <Delayed payments to pharma MSMEs: A major challenge – Express Pharma>accessed 8 March 2024
[11] BL Bengaluru Bureau, ‘Delayed Payments, Lack of Formal Financing in MSMEs Affect Job Creation’ The Hindi Businessline (Bengaluru, 3 March 2023)
[12] ‘Applications & Cases Status of Micro and Small Units (MSEs)’, Ministry of Micro, Small and Medium Enterprises Government of India<MSME SAMADHAAN – Delayed Payment Monitoring System>
[13] Income Tax Act 1961, s 43 B
[14] CA Dindayal Dhandaria, ‘Delayed Payments to MSME Vendors – Drastic Consequences’(Taxmann, 1 February 2023)<Delayed Payments To Msme Vendors – Drastic Consequences (taxmann.com)> accessed 9 March 2024
[15] ‘Section 43B(h): Is Finance Ministry Revising the New Rule for Payment to MSMEs Within 45 Days; Know Here ’(A2Z Taxcorp LLP, 2 March 2024)<Section 43B(h): Is Finance Ministry revising the new rule for payment to MSMEs within 45 days; Know Here | A2Z Taxcorp LLP> accessed 9 March 2024
