Micro, Small, and Medium Enterprises (MSMEs) form the backbone of India’s economy. However, many face challenges due to delayed payments from larger companies. To address this issue, the government introduced new provisions under the Income-tax Act in 2023, which aim to ensure timely payments to MSMEs and safeguard their financial stability. Here’s how it works and why it matters.
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The 45-Day Rule: How It Works
In April 2023, a new clause (h) was added to Section 43B of the Income-tax Act, 1961. It mandates that payments due to micro and small enterprises must be settled within 45 days. Any payment made after this period will not be allowed as a deduction for the buyer until the payment is made. This provision holds companies accountable and encourages timely transactions.
Additionally, businesses that delay payments to MSMEs for over 45 days are required to file half-yearly returns with the Ministry of Corporate Affairs. They must specify the amounts due and provide reasons for the delays.
The Role of TReDS
To further support MSMEs, the Reserve Bank of India (RBI) introduced the Trade Receivables Discounting System (TReDS). This platform allows MSMEs to discount their trade receivables, providing them with immediate cash flow. Recently, businesses with a turnover of over ₹250 crore and central public sector enterprises were mandated to join this platform.
TReDS connects MSMEs with multiple financiers, ensuring they receive timely payments and reducing dependency on large buyers.
Micro & Small Enterprises Facilitation Councils (MSEFCs)
Under the MSMED Act, 2006, Micro & Small Enterprises Facilitation Councils (MSEFCs) have been established across states and union territories. These councils resolve cases of delayed payments. Currently, 159 MSEFCs are operational, with some states like Tamil Nadu and Uttar Pradesh having multiple councils.
The government’s Samadhaan portal tracks and handles complaints about delayed payments. Out of over 2.13 lakh complaints filed involving ₹47,366 crore, only 43,069 cases have been resolved, amounting to ₹7,085 crore. While progress is being made, more needs to be done to streamline the process.
My Opinion: A Step in the Right Direction
The 45-day rule is a significant step toward protecting MSMEs from financial strain caused by delayed payments. It brings accountability to large companies and ensures MSMEs have better cash flow to sustain operations. However, challenges like low resolution rates and awareness about these provisions remain.
MSMEs also need support in adopting digital tools like TReDS and better access to credit facilities. While the initiatives are promising, their success depends on robust implementation and enforcement.
Conclusion
The government’s measures to address MSME delayed payments are commendable. The 45-day rule under Section 43B, the mandatory onboarding of TReDS, and the role of MSEFCs reflect a commitment to empowering small businesses.
However, there is room for improvement. Faster case resolutions, increased awareness, and better enforcement of rules can significantly enhance the impact of these initiatives. Ensuring the financial health of MSMEs is crucial for the economy, and these reforms are a step toward securing their growth and sustainability.
