Indian firms that delay paying MSMEs face new sanctions
Companies in India that are late paying small firms’ bills will be liable to fresh sanctions under changes to the Income Tax Act that have now come into force.
In last year’s Budget the government proposed an amendment clause to the Act (Section 43B) to address the challenge of delayed payments faced by MSMEs across the country.
The clause, which came into effect on April 1 2024, with 2024-25 as the assessment year (that is financial year 2023-24), aims to address the issue by disallowing expenses to buyers on invoices from MSEs unless paid within 45 days (where agreement exists) and within 15 days if there is no agreement.
Section 43B of the Act essentially provides a list of expenses allowed as deduction under the heading ‘Income from business and profession’ only in the year of actual payment, instead of the year when it was incurred as an expense.
Invoices issued before April 1 2023, as well as outstanding dues as of March 31 2023, remain unaffected by the amendment and no check or consequences apply to delays in payment to MSEs during the financial year, provided the payment was made by March 31 2024.
Other than the current measure, buyers failing to pay MSMEs on time need to submit a half-yearly return to the Ministry of Corporate Affairs stating the amount of payments due and the reasons for the delay.
Moreover, according to MSME Samadhaan rules, the buyer has to pay compound interest on the money owed to the MSME at three times the bank rate notified by the Reserve Bank of India in case the payment is not made within 45 (or 15) days.
MSME Samadhaan is a portal created by the Ministry of Micro, Small and Medium Enterprises (MSME) where micro and small firms can file applications online regarding delayed payments.
Commenting on the need for the new rules, Deepak Karandikar, President of the Mahratta Chamber of Commerce, Industries and Agriculture (MCCIA), an industry body in Pune, said that “for the last 18 years the MSME sector has been flogged as nobody pays”. The region’s 25,000 MSME businesses “have been bullied and made to bear the burden of working capital, forced to borrow at high interest rates from the market to keep their business afloat”, Karandikar said.
India’s overall business growth nears 14-year high
India’s private sector continued to strengthen in April, with business activity expanding at its fastest rate in nearly 14 years, according to S&P Global’s PMI latest data.
S&P’s report said this growth was fuelled by positive demand trends. As per the HSBC Flash India PMI data, the manufacturing industry led the latest upturn – as was the case in March – although growth at goods producers was slower when compared with the acceleration experienced by service providers.
The headline HSBC Flash India Composite PMI Output Index, a seasonally adjusted index that measures the month-on-month change in the combined output of India’s manufacturing and service sectors, reported a rise from 61.8 in March to 62.2 in April, indicating the fastest rate of increase in aggregate business activity since mid-2010.
Any score under 50 recorded in the index represents a contraction in the sector; a score above 50 represents expansion.
Pranjul Bhandari, Chief India Economist at HSBC, said: “Strong performance in both the manufacturing and service sectors, led by increased new orders, resulted in the highest composite output index since June 2010. In particular, services growth accelerated further in April as new orders in both domestic and international markets rose.
“Meanwhile, both composite input and output prices moderated in April, albeit remaining robust. Manufacturing margins improved in April as firms were able to pass on higher prices to customers due to strong demand conditions. In fact, manufacturing industries sharply increased their staffing levels and input buying activity.”
“Overall future business outlook improved further in April, buoyed by robust demand.”
