I-T clause causing obstacles in prompt payment to MSMEs

1. I-T clause causing obstacles in prompt payment to MSMEs A recent addition to the Income-Tax (I-T) Act in the budget for 2023-24, which was intended to ensure timely payments to micro, small and medium enterprises (MSMEs) within 45 days of providing goods or services, has led to a unique issue - where big companies are now cancelling their orders with MSMEs registration and giving them to unregistered MSMEs, according to a report. In the meantime, the Supreme Court declined a plea and instructed the Federation of All India Vyapar Mandal to take their case against the 45-day payment rule under section 43B(H) of the I-T Act to the high court. As per the report, the Union Ministry of MSME is said to have contacted industry players for potential solutions. “It asked stakeholders to suggest solutions for issues arising from the I-T Act and propose alternate methods to quickly clear MSME invoices” According to the report, tax professionals believe that the deadlines for payments are not practical and suggest that the government should prolong them to coincide with the filing of tax returns instead of the end of the fiscal year. The ministry is contacting MSMEs for the second time. Two weeks after releasing the provisional budget for 2024-25, they officially contacted MSMEs to gather feedback on the recent addition to section 43B of the I-T Act from 2023-24, which was designed to ensure prompt payments for smaller businesses. An additional provision (h) in section 43B permitted big companies to claim deductions for payments made to MSMEs only when they were received. Bigger corporations were typically unable to claim deductions on their tax filings, leading to the possibility of higher tax payments. During the audit of balance sheets in the 2024-25 assessment year for transactions in the 2023- 24 financial year, larger companies began to express worries about increasing tax obligations, and many MSME owners also noted order cancellations due to the new tax provision. According to reports, MSMEs mentioned that large companies are choosing to work with unregistered MSMEs to avoid complying with regulations and maintain a longer payment timeframe of 90-120 days. The report cites individuals who are knowledgeable about these trends. According to KE Raghunathan, who is the national chairman of the Association of Indian Entrepreneurs, there have been numerous cancellations from MSMEs including ancillary

2. units and dedicated suppliers, as reported by the newspaper. Some companies are also attempting to compel suppliers to revoke their MSME registration. The majority of individuals only understood the complete consequences of the tax provision towards the end of January as they were expecting to receive the payments before March 31, but did not. The payment cycle between the buyer and supplier would be extended, for example to 90 or 120 days. However, nowadays businesses are reluctant to make purchases from micro, small, and medium enterprises (MSMEs). Before, the federation took the matter to the highest court, contesting section 43B (H) of the IT Act, which restricts MSMEs from providing credit to customers for more than 45 days. Any purchaser who goes over this threshold will encounter tax fines and compound interest fees at a rate three times higher than the bank rates specified by the Reserve Bank of India (RBI). The Federation’s petition questions the legality of section 43B(H), stating that it negatively affects the overall business sector, specifically in Gujarat with textiles, chemicals, and engineering companies. Different industry groups have expressed these worries to the central government, emphasizing the negative impact of the rule on micro, small, and medium enterprises and calling for it to be reviewed.