Credit and finance are a key part of Micro, Small, and Medium Enterprises (MSMEs), helping them to grow and be sustainable in the market. However, one of the most significant hurdles they encounter is the challenge of recovering dues from public or private buyers. This struggle can severely impact their working capital cycle, hindering their competitiveness both locally and globally.
A large number of MSMEs, especially those catering to at least 20% of the total annual purchases by central ministries, departments, or public sector units (PSUs), find themselves waiting for payments well beyond the agreed-upon terms. When buyers fail to settle invoices within 45 days of accepting goods or services, MSMEs face the task of maintaining their operations without the necessary funds.
The delayed payments not only disrupt the cash flow of MSMEs but also restrict their ability to invest in growth initiatives. With funds tied up, they struggle to pay their own suppliers, employees, and other operational expenses. This not only affects the entire ecosystem of MSMEs but also their stakeholders.
MSE Facilitation Councils (MSEFCs)
To address this issue, state governments have established MSE Facilitation Councils (MSEFCs) as per the provisions of the Micro, Small and Medium Enterprise Development (MSMED) Act. These councils serve as a platform to seek redressal for delayed payments with MSMEs from their buyers. MSMEs now have the option to file online complaints against government departments, PSUs, and other buyers who fail to make timely payments. This digital process simplifies the grievance redressal mechanism, making it more accessible and efficient for businesses.
Steps To File An Online Complaint
- Visit the delayed payment filing and monitoring portal by the MSME ministry samadhaan.msme.gov.in
- Click on the ‘Case Filing for Entrepreneur/MSE Units’ tab
- Select the type of MSME registration — Udyog Aadhaar Number or Udyam Registration Number
- Enter the registration number, mobile number as in the registration certificate, and verification code
- Click on ‘Validate Udyog Aadhaar’ or ‘Validate Udyam Registration’ as per your registration type
- Enter the OTP shared on the registered mobile number or email address for verification
- Upload PDF of the required documents (each document of 2MB size or less) such as work orders of the respondent (buyer) and invoices generated by you against those work orders
- Click on the ‘Submit’ button to complete the application process
- An acknowledgment will be sent to you along with the address of the concerned MSEFC of your state
Ensuring Timely Payments to MSMEs: Section 43B(h)
The Finance Act of 2023 introduced an important amendment to the Income Tax Act by adding clause (h) to Section 43B. This clause specifically targets payments owed to MSMEs, stipulating that if these payments are not resolved within the 45-day timeframe, they will not qualify for tax deductions until the payment is made. Starting April 1, businesses will be required to settle their outstanding payments with MSMEs within 45 days of the transaction. Non-compliance with this regulation will result in a tax liability on the overdue amount.
The primary objective of Section 43B(h) is to incentivize larger entities to prioritize settling their dues with MSME counterparts. By linking tax deductions to timely payments, the aim is to create a more supportive economic environment for these smaller businesses. Additionally, Section 43B(h) applies to transactions involving the purchase of goods or services from enterprises registered under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006. This means that any delays in payments to these registered MSMEs could impact the tax deductions of the businesses involved.
Moreover, through this change, businesses cannot claim deductions for expenses related to goods or services purchased from MSMEs if the payment is delayed beyond the specified 45-day period. More importantly, delayed payments to MSMEs will increase the tax liability of the defaulting businesses.
However, the new regulation has caused appeals from various industry bodies. The Confederation of All India Traders (CAIT) has requested Finance Minister Nirmala Sitharaman to defer the clause related to MSME payments until April 2025. The Clothing Manufacturers Association of India (CMAI) has talked about the potential losses for MSME apparel manufacturers, estimating the losses to be from Rs 5,000-7,000 crore in the January-March quarter due to the amendment.
“It is common for even well-regarded retailers to adhere to this timeframe for settling payments. Therefore, the expectation for retailers to instantly adjust their business models to comply with a 45-day payment cycle is highly unrealistic,” stated the CMAI in a note.
“Additionally, a significant number of retailers are considering returning unsold merchandise to the manufacturers, thus relieving themselves of the payment obligation,” it added.
Frequently Asked Questions (FAQs)
1. Can I file an application at the council?
Yes, the application can also be filed physically at the MSE Facilitation Council (MSEFC). Every application filed with the council is visible after verification post 15 days of filing and is then converted into a case for recovery or rejection.
2. Is Udyog Aadhaar or Udyam registration number mandatory to file the application?
Yes, the unit needs to register itself with the MSME Ministry before filing for delayed payment with the council.
3. Can the MSME Ministry intervene in the case with the council?
No. Only the council is empowered as per the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 to make decisions regarding references made to them. Hence, the ministry cannot interfere with the judicial functioning of an MSEFC.
4. How many days does it take to settle the delayed payment case at the council?
Every reference made to the MSEFC has to be decided within a period of 90 days from the date of making such a reference, as per provisions laid in the Act, according to the information on the Samadhaan portal.
5. How does the budget announcement amending section 43B of the Income Tax Act work to solve the delayed payment crisis?
According to the announcement, buyers will be able to claim a deduction for payments made to MSMEs only after they actually make the payment to their MSME sellers. Otherwise, they would be liable to pay income tax on it. The move aims at forcing buyers to pay MSMEs on time, thus alleviating the issue of delayed payments in the sector.