45-Days Payment Security Clause Creating Hurdles for MSMEs as Companies Place Orders with Unregistered Players. SC Allows Vyapar Mandal To Move HC: Reports
Moneylife Digital Team 06 May 2024
A new provision in the Income-Tax (I-T) Act in Budget 2023-24 that aimed to secure payments to micro, small and medium enterprises (MSMEs) within 45 days of the supply of goods or services has resulted in a peculiar problem — that of large companies cancelling orders to registered MSMEs and placing these with unregistered MSMEs, says a report. Meanwhile, the Supreme Court, while refusing to hear a plea, directed the Federation of All India Vyapar Mandal to approach the high court against the 45-day payment rule under Section 43B(H) of the I-T Act. 
According to the report from Indian Express, the Union ministry of MSME is learnt to have reached out to industry players for solutions. "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."
Tax experts, however, are of the view that the payment timelines are unrealistic and the government needs to reconsider extending it to at least the time of filing of returns rather than at the end of a financial year, the report says.
This is the second time the ministry is reaching out to MSMEs. A fortnight after presenting the interim Budget for 2024-25, it had formally written to MSMEs seeking comments on the new clause in Section 43B of the I-T Act introduced in 2023-24 that aimed to secure timely payments for smaller units. A new clause (h) in Section 43B allowed for deduction for larger companies against payments done to MSMEs only after they were actually paid. Larger companies were otherwise not allowed to make deductions in their tax returns, resulting in the prospect of increased tax liability.
This led to a peculiar problem, the newspaper says. "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 report says quoting people aware of the developments.
KE Raghunathan, national chairman of the Association of Indian Entrepreneurs, told the newspaper that “Many cancellations have been reported from MSMEs such as ancillary units and dedicated suppliers. Some corporations are also trying to force suppliers to cancel their MSME registration. Most people realised the full impact of the tax provision only towards January-end because they were supposed to get the payments by March 31 but did not. The earlier payment cycle between the buyer and the supplier would be longer, say 90 days or 120 days. But now companies don’t want to buy from an MSME.”
According to the report, the new provision has also unintentionally resulted in a competition between registered and unregistered MSMEs, with many smaller entities opting to de-register themselves to survive and not lose business. “They (companies) want to purchase goods from the MSMEs not having a registration. For small players, they have to supply, otherwise business will collapse. To avoid competition, MSMEs are surrendering their registrations,” Jalapathi K, secretary of the Tamil Nadu and Puducherry Chartered Accountants’ Association, told the newspaper.
Last month, more than 40,000 Indian small businesses, including 12,000 in Gujarat, have cancelled their registration and approached the Supreme Court with an appeal to remove the mandated rule to clear payments within 45 days, says a report from CNBCTv18.
Earlier, the Federation reached the apex court challenging section 43B(H) of the I-T Act, that limits MSMEs from extending credit to buyers beyond 45 days. Any buyer exceeding this limit faces tax penalties and compound interest charges at three times the bank rates notified by the Reserve Bank of India (RBI).
The petition filed by the Federation challenges the constitutionality of section 43(B)(h), citing its detrimental impact on the entire business community, particularly Gujarat-based textiles, chemicals and engineering units.
Various industry associations have echoed these concerns to the Union government, highlighting the adverse effects of the provision on MSMEs and urging its reconsideration. (Read: Traders File Petition in SC against I-T Penalty Clause on MSME Credit to Buyers: Report
While granting the Federation permission to withdraw their petition, the apex court provided the MSMEs with the liberty to pursue their case in the HC, says another report from CNBCTv18.
1 month ago
large Indian are such a pathetic lot! They believe that payment terms should be only in their favour. Shameful to say the least!
Transit Rent Not Taxable, Not Subject to TDS, Rules Bombay HC
Moneylife Digital Team 10 May 2024
Transit rent received from builders during redevelopment projects is not taxable and thus is exempted from tax deduction at source (TDS) obligations, the Bombay High Court (HC) says.
In an order last month, the Bombay HC bench of...
Malabar Parota Attracts 5% GST and Not 18%, Rules Kerala HC
Moneylife Digital Team 20 April 2024
Holding that Classic Malabar Parota and Whole Wheat Malabar Parota are akin or similar to the products mentioned in chapter heading 19 (of goods and services tax-GST), and the ingredients used in and the process applied in their...
Bombay HC Gives Interim Relief to Bank of Baroda in Rs150 Crore GST Demand on Monthly Average Balance Charges
Moneylife Digital Team 17 April 2024
Granting an interim relief to Bank of Baroda (BoB), the Bombay High Court (HC) restrained the tax authorities from taking any coercive recovery action against the public sector bank (PSB). The case is related to a show-cause notice...
Traders File Petition in SC against I-T Penalty Clause on MSME Credit to Buyers: Report
Moneylife Digital Team 16 April 2024
The Federation of All India Vyapar Mandal has filed a petition in the Supreme Court against Section 43B(H) of the Income Tax (I-T) Act. This newly introduced provision, part of the Finance Act 2022, limits micro and small enterprises...
Free Helpline
Legal Credit