A new provision in the Income-Tax Act in Budget 2023-24, which aimed to secure payments to micro, small and medium enterprises (MSMEs) within 45 days of supply of goods or services has resulted in large companies canceling orders to registered MSMEs and placing these with unregistered MSMEs.
While some MSME associations have approached the Supreme Court against the new norm, the Union MSME Ministry is learnt to have reached out to industry players for solutions, The Indian Express reported.
It has asked stakeholders to suggest ways to resolve the issues arising from the I-T Act and to recommend possible alternate mechanisms for timely clearance of MSME bills.
In order to promote timely payments to micro and small enterprises, the Finance Act 2023 inserted a new clause (h) in section 43B of the Income Tax Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the specified time limit of 45 days in section 15 of the MSME Development Act 2006 will be allowed as deduction only on actual payment. The buyer will have to pay tax on the payment if it is not done in the specified time limit.
As balance sheets get audited in the assessment year 2024-25 for transactions in financial year 2023-24, bigger companies started flagging concerns about ballooning tax liability; and many MSME owners too reported cancellation of orders due to the new tax clause. MSMEs also pointed to big companies shifting business to unregistered MSMEs, as it lends them the flexibility to not meet the mandatory provision and continue with a longer payment cycle of 90-120 days, the Indian Express report said.
The Union Ministry of Finance is looking into a proposal to tweak the new income tax rule under which business enterprises will be required to make payments to micro, small and medium enterprises (MSMEs) within 45 days.
Some businesses have sought deferment of the provision by a full financial year while others have requested that the 45-day time limit be extended.
Recently, the Confederation of All India Traders (CAIT) had also written to Finance Minister Nirmala Sitharaman had called for suspension of the implementation of the provision until sufficient clarification and information dissemination are achieved nationwide.
CAIT further appealed to the government to postpone the implementation of this law from April 1, 2024, to April 1, 2025, to provide traders with a one-year deferral period. “This will affect the business of micro and small enterprise adversely as the industry will prefer to work with medium enterprise,” it had said.
Data shared by the MSME Ministry in Parliament in February this year said that 2.28 crore MSMEs registered during July 1, 2020 to January 30, 2024 on its Udyam portal, while 1.28 crore micro enterprises registered on the Udyam Assist Platform during January 11, 2023 to January 30, 2024, the Indian Express reported.
As of January 30 this year, around 35,396 MSMEs cancelled their Udyam registration due to shut down of business during July 1, 2020 to January 30, 2024, the data showed. Sector-wise split showed that out of 35,396 cancelled registrations, 9,308 were from the manufacturing sector, 9,511 from trading and 16,577 were from services.