Amendment 43-B(h) for MSME Payments Stop Worrying too much!

Businesses should STOP WORRYING too much on
43B Amendment

Here’s why…?

-by Rajiv Chawla
Chairman, IamSMEofIndia
19th February’24

Dear friends,

There’s a lot of discussion and hue and cry from many businesses regarding the 43B Amendment that disallows expenses on invoices from MSEs unless paid within 45 days (where agreement exists) and within 15 days (where no agreement exists). I’ve received many representations regarding the same and I find most worries highly exaggerated and much ado about nothing. Here's why...?

We wholeheartedly acknowledge the government’s commitment to fostering an ecosystem where payments to Micro and Small Enterprises (MSEs) occur promptly and without undue delays. 43-B Amendment is just another step by the Government towards creating an ecosystem that ensures timely payments to the MSEs. 
 
Currently, two mechanisms within the tax structure contribute to achieving this goal: 

1. GST Law Provision: Under the existing GST law, if payment for a GST invoice is not made within 180 days, the buyer must reverse the GST input credit along with interest. This provision acts as a deterrent, ensuring timely payments to all GST-registered suppliers across all categories.

2. Amendment in Section 43-B of Income Tax: The second mechanism pertains to the discussed amendment in Section 43-B of the Income Tax Act. 

From a critic’s perspective, I find it much less effective in its present form and it is likely to yield much lesser desired results than it was actually intended to yield.

REASONS why it is less effective:
a) Invoices issued before April 1, 2023, as well as outstanding dues as of March 31, 2023, remain unaffected by the Amendment 

  b) No check or consequences apply to delays in payments to Micro and Small Enterprises (MSEs) during the financial year if the payments are settled by March 31, 2024

c) This implies that if an invoice raised on April 1, 2023, is paid on March 31, 2024 (after a full year), the expense will be permissible

d) Consequently, there is minimal impact on payment delays during the year or delays in settling previous dues

e) The buyer’s responsibility is to settle all invoices as on 16th February’24 (where 45-day agreement) and Invoices as on 17th March’24 (if no specific agreement exists) within the fiscal year, ending by March 31, 2024.

So where’s the worry, unless someone actually has no intention of paying for purchases from MSEs during this FY? In their case, they better worry.

To most of us, it actually means that buyers must clear all invoices received from MSEs from 01.04.23 till 16.02.24 (where agreement exists) and upto 17.03.24 where no agreement exists. In a nutshell, delay allowed on purchases in the first three quarters and timely payments only for the purchases made in the last quarter. Overall, still very much in favour of buyers.

In fact, there’s a big Blessing in disguise that the Amendment offers to the buyers. Inadvertently, the amendment provides businesses with flexibility to dress up their financials and plan taxes. For instance, if profits are lower in a given year, it allows for booking expenses in the subsequent fiscal year by deferring payments to MSEs until later in that year.

We, at IamSMEofIndia, wholeheartedly acknowledge the government’s commitment to fostering an ecosystem where payments to Micro and Small Enterprises (MSEs) occur promptly and without undue delays. However, very stringent laws may deter buyers from doing business with MSEs in their supply chain and may make buyers opt for Medium & Large enterprises.

My take on Traders registration as MSEs and the Applicability of 43B Amendment:
1) Numerous traders have registered as MSMEs. The intention of the Ministry of MSME Orders is to cover the Small Traders also for the benefit of Priority Sector lending, not to adhere to mandatory payment terms of 15 or 45 days.

Unfortunately, the 43B amendment does not explicitly address the eligibility or exclusion of traders. Income Tax Assessing Authorities in India are likely to follow the IT Amendment issued by the Finance Ministry rather than the MSME ministry’s order unless the 43-B amendment specifically addresses this matter.
 
2) Also, distinguishing between a pure trader and a trader-cum-service provider is nearly impossible. Most traders offer some form of service alongside their trading activities, making them eligible for MSE status even concerning payment terms. For instance, a trader selling air conditioners may also provide installation services, maintenance, and repairs. Similar to manufacturing, where we have a “Trading & Manufacturing Account,” traders now effectively fall into a category of “Trading & Services Account,” encompassing all purposes under registered MSEs.
 
3) Unfortunately, the present amendment may result in losses for MSE traders. In the long run, buyers seeking credit periods longer than 45 days may prefer to engage with traders whose turnover exceeds Rs. 50 crore (Medium Enterprises).
 
4) Voluntary De-registration by MSMEs: Due to the fear of losing business, some Micro and Small Enterprises may choose to deregister themselves. If this happens then it will defeat every purpose of the MSMED Act.

SUGGESTIONS:
1. Business laws should permit buyers and sellers to determine their own payment terms. Each trade has unique needs. For instance, in the case of capital goods supply, a buyer and seller might agree on an initial 50% advance payment, followed by the balance after 6 months of trials and testing. Therefore, legal frameworks should accommodate flexible payment terms, considering market dynamics and sector- specific variations. These laws should be robust and swift in addressing breaches of agreements rather than deciding payment terms and tenure.

2. Uniform Treatment for Enterprises:
Extend the applicability of the 43-B Amendment to payments made to Medium Enterprises. This ensures equitable treatment of Micro, Small, and Medium Enterprises by buyers, preventing a preference for Medium Enterprises solely due to payment terms.
 
3. Protection for Medium Enterprises:
Currently, the MSME Act 2006 provides protection against delayed payments only to Micro and Small Enterprises. To further streamline this process, include Medium Enterprises in this safeguard. Allow Medium Enterprises to file cases for dispute settlement or delayed payments through State Facilitation Councils. This approach not only expedites the recovery of dues but also acts as an alternative dispute resolution mechanism, reducing the burden on courts and saving time. Importantly, this change would have no adverse financial impact on the government

Please share your feedback, concerns, views, suggestions.

With warm regards,


-Rajive Chawla
chairman@iamsmeofindia.com