MSME sector will gain from amendment to 18-year-old MSMED Act

In what comes across as good tidings and will help boost the country’s large MSME sector quite significantly, the Union government is to pep up procedures by revising the MSME Development Act 2006. This is endeavoured to fortify the mechanisms for ensuring prompt payments to micro, small, and medium enterprises (MSMEs). This is certain to be welcomed by MSMEs with open arms. Under the prevailing regulations, if a buyer delays payment beyond 45 days after receiving goods or services from an MSME, they are required to pay compound interest on the overdue amount at three times the bank's notified rate, calculated with monthly rests. Furthermore, each state possesses a facilitation council dedicated to resolving disputes and facilitating clearance of dues by directing the buyer. The Finance Act 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro, Small and Medium Enterprises for goods supplied or services given may be deducted in the same year if it is paid within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

The Finance Act 2023 is a crucial financial document that outlines tax proposals and budgetary allocations of the central government for the fiscal year. The government will implement a rule in FY25 requiring payments to MSMEs to be made within 45 days, failing which companies will have to pay tax on the amount due. Any change to the rule is possible only in the Union Budget in July. The proposed revision is slated to come into effect on April 1, failing which the companies cannot claim deductions on it. All these moves aim at ensuring that MSMEs maintain uninterrupted cash flows and their economic sustainability is strengthened. Significantly, MSMEs, normally, face mounting challenges largely due to delayed payments from public and private entities. Small businesses often operate on tight margins and any payment delays will disrupt their cash flow and hinder operational capabilities, neither of which makes for a sound proposition. From manufacturers to service providers, the ripple effects of delayed payments are felt throughout the MSME ecosystem.

The latest income tax amendment aims at addressing the crucial issue. The parliament has already approved the amendment. The new rule implies that an employer, including a company, can claim a deduction for tax, duty, cess or fee payable to the government only when it is actually paid, regardless of when it is accrued or incurred. It is pertinent to note that as per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the buyer is required to make payment to the MSME supplier within 45 days of the acceptance of goods or services rendered. The Union Finance minister Nirmala Sitharaman had, in the past, raised the issue several times, especially in the wake of the pandemic, and asked businesses to make timely payments. There is no doubt, whatsoever, that, if executed stringently and properly, the latest move by the Centre will certainly mark a significant step towards safeguarding the interests of MSMEs.