I-T Clause Creates Hurdle for MSME Payments

In the Budget of 2023-24, a new provision was introduced in the Income-Tax Act to ensure timely payments to micro, small, and medium enterprises (MSMEs). However, this provision has led to unintended consequences, with large companies opting to cancel orders with registered MSMEs and instead placing them with unregistered ones. This has raised concerns among MSME associations and prompted the Union MSME Ministry to seek solutions from industry stakeholders.

1: Dimension- Impact on MSMEs: 

The new provision, aimed at securing timely payments for MSMEs, has created challenges for both MSMEs and large corporations.

• Order cancellation: MSMEs have reported cancellations of orders and pressure to cancel their MSME registration to compete with unregistered entities.
• Financial losses and competition: The scheme, though well-intentioned, has resulted in negative outcomes, as MSMEs face financial losses and competition from unregistered counterparts.
• De-registration: Many smaller entities are choosing to deregister themselves to avoid losing business to unregistered competitors. This has further exacerbated the challenges faced by MSMEs, forcing them to adapt to survive in the market.
  • As per MSME Ministry’s data, 28 crore MSMEs registered during July 1, 2020 to January 30, 2024 on Udyam portal, while 1.28 crore micro enterprises registered on the Udyam Assist Platform during January 11, 2023 to January 30, 2024.
  • As on January 30 2024, around 35,396 MSMEs cancelled their Udyam registration due to shut down of business during July 1, 2020 to January 30, 2024.
• Tax liabilities: The payment timelines mandated by the new provision are unrealistic. The disallowance of expenditure due to delayed payments has increased tax liabilities for large corporations, impacting their dealings with MSMEs.

2: Dimension- The right approach to solve the issue 

• The government should reconsider the timelines and extending them to at least the time of filing returns.
• While some industry associations advocate for no course correction from the government, others suggest options like mandatory bill discounting and extension of payment timelines to address the challenges faced by MSMEs.
• Overall, the implementation of the new tax provision has inadvertently created challenges for MSMEs, necessitating stakeholder engagement and potential policy adjustments to ensure the sustainability of MSMEs in the market.