One big step that should help timely payments to Micro & Small Enterprises
An interesting challenge it poses for the same MSMEs
We now have Two tax laws to support timely release of payments to Businesses.
1. GST: Buyer has to reverse GST Input Credit with interest if payment not made to the supplier within 180 days (Applicable to all businesses- Micro, Small, Medium & Large)
2. New proposed change in Section 43B of Income Tax Act announced in the Union Budget by Hobble Finance Minister shall further help Micro and Small Enterprises because their buyers shall have to pay them in time (As per terms or within 45 days, whichever is less and within 15 days if no payment agreement) otherwise buyers cannot book expense and expense shall be disallowed under Income Tax. Such unpaid amount shall be added to the buyer's income and make buyer liable to pay Income Tax.
However, unlike ESI, PF and statutory payments in Section 43B, expense of these invoices can be claimed, even if paid later but before filing of returns.
Action: Because all businesses are buyers too, these laws are applicable on ALL. So even Micro and Small Enterprises must pay their Micro and Small suppliers in time. Otherwise their unpaid purchase invoices shall be disallowed making buying Micro or Small Enterprise liable for more Tax. Plus, reversal of GST Input Credit if not paid within 180 days.
Advice: All businesses must Make sure to pay dues for Invoices upto 15th February to all Micro and Small Suppliers before 31st March so that invoices beyond 45 days do not show in your 31st March Balance Sheet.
The above law, if approved, shall be implemented wef 01.04.2024 and applicable from AY 2024-25. So we all have almost 14 months time to develop a culture of paying to Micro and Small Enterprises latest within 45 days.
Challenge: Last year, Ministry of MSME allowed Traders also to register as MSME. Many such Traders supply to MSEs at longer agreed payment terms like 60, 90 or 120 days and cover the interest cost in the sale price itself. In a way, they are RM suppliers + Financial Creditors.
Therefore, Govt mentioned specifically that Traders registered as MSME shall benefit only for banking, Priority Sector lending, meaning thereby that they shall not be covered under the Delayed Payment (45 day) Section 15 of MSME Act. This allowed the traders to supply at longer payment terms without making the buyers liable for Penal Interest (3 times the bank rate).
However, since this new proposed amendment is in Income Tax Act, invoices of traders registered as Micro or Small will also be covered in this and need to be paid within 45 days otherwise expense shall be disallowed.
This shall be a huge Challenge for MSE buyers because Traders while supplying are also informal Financial Creditors to the buyers and provide longer payment terms while covering the finance cost in the pricing, and very helpful for millions of those MSEs with no access to or inadequate back credit. Such MSEs, therefore, shall be deeply negatively affected.
IamSMEofIndia shall try to seek suitable correction/ amendment from Ministry of Finance with support from Ministry of MSME.
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