1. Background
Micro, Small and Medium enterprises (mSMEs) are a mainstay of any economy contributing to production, employment generation and exports. However, non-availability of adequate funds has been identified as one of the major reasons for lack of growth of the sector. One of the main contributors for lack of funds is the delayed realization of receivables thereby leading to sickness of the MSME. Chakraborty Committee identified delayed payments as one of the major reasons for sickness in mSMEs.
2. The skewness in negotiation power of mSMEs with their large sized trading partners
Most of the mSMEs have, on at least one end of the trade cycle, a trading partner who is significantly large in size. Where the supplier is large, the mSME cannot enjoy any credit from the supplier. On the other hand, all sales to the large sized customer is always with a longer credit period, and also may be at a much finer price. As such, the mSMEs and large corporate groups enter into negotiations which are usually done around the pricing of the product or the terms of credit to the disadvantage of the mSME. These are usually lop sided in favour of the large corporates. It has been mostly seen that the agreed credit period is not honoured by the large buyers resulting in a strain on the working capital of the mSMEs. Where such strain continues for a long period of time, it may lead to sickness of the mSMEs.
3. Resolutions under mSME Act
3.1 The Micro, Small and Medium Enterprises Development Act, 2006 (mSME Act) has inbuilt measures for dealing with late payments by buyers/large corporates to micro and small businesses in sections 15 to section 24 of the mSME Act.
3.2 Section 15 of the MSME Act mandates payments to micro and small enterprises within a maximum period of 45 days. Where there is an agreement, written or otherwise, the buyer is required to make payment on or before the agreed date. However, if there is no such agreement, the section mandates that the payment should be made before the appointed date[1]. This can be clarified by way of an example (refer to Annexure).
[1] Section 2(b)- ‘appointed date’ means the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
Explanation (i) ‘the day of acceptance’ means (a) the day of actual delivery of goods or rendering of services, or (b) where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of delivery of goods or rendering of services, the day on which such objection is removed by the supplier.
(ii) ‘the day of deemed acceptance’ means, where no objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of delivery of goods or the rendering of services, the day of actual delivery of goods or the rendering of services.
3.3 If a buyer is not able to pay the supplier for the supplies of their goods or services within the time period of 45 days of acceptance of the goods/services or the scheduled day of acceptance, then the buyer is required to pay compound interest to the supplier on the payable amount up to three times. The amount is set by the Reserve Bank of India (RBI) on a monthly basis.
3.4 Some of the measures for countering the problem of delayed payments which have been inbuilt in the mSME Act are as follows:
1. Interest on delayed payments
Sections 16 and 17 provides that when a buyer fails to make payment to the supplier, notwithstanding anything contained in any agreement between the buyer and seller, the buyer is required to pay compound interest from the appointed or agreed date at 3 times the bank rate notified by the RBI.
2. Remedy through Facilitation Council
Section 18 provides for Micro and Small Enterprises Facilitation Council (FC). The key features of a FC are as follows:
- The FC can either suo moto conduct conciliation in the matter or seek the assistance of institution or centre providing alternate dispute resolution services such as arbitration.
- Where the conciliation between the buyer and seller is not successful, the Council can suo moto take up dispute for arbitration or refer it to an institution or centre. Every reference should be decided within a period of 90 days.
3. Section 19 provides that no application for setting aside any decree, award or other order made by the Council or any institution or centre providing alternate dispute resolution services will be entertained by any Court unless the appellant (other than the supplier) has deposited 75% of the amount.
4. Sections 20-21 provide for establishment of FC. These FCs are established by the State Government by way of a notification. They consist of 3 to 5 members which are usually from the Department of Industries, representative of associations, banks and financial institutions or persons having specialised knowledge.
5. Disclosure in audited financial statement of the buyer
Section 22 provides that where a buyer has delayed payments to a micro or small supplier, a separate disclosure of the principal amount and interest is required to be made in the annual accounts audited under any law for the time being in force.
6. Non-deductibility of interest on late payment under Income-tax Act
Section 23 provides that the amount of interest paid or payable will not be allowed as a deduction under the Income tax act. The tax auditor is required to comment in clause 22 of the Tax audit report regarding the amount of interest paid/payable under section 23 of the mSME Act. This interest will not be allowed as a deduction in the computation of income of the buyer.
4. Resolution by way of section 43B(h) of the Income tax Act, 1961
- Despite the multiple of measures for deterring late payments to micro or small suppliers, the problem still persists. The mSMEs are reluctant to take the matter to FC as they fear that their large customers would stop procuring goods and services from them. This practical problem faced by the micro and small enterprises, even with the existing enabling provisions in the mSME Act, is perhaps leading the Government to introduce further measures.
- Accordingly, a new clause (h) has been introduced in section 43B of the Income tax Act, 1961 (the Act) vide Finance Act. 2023.
- Historically, section 43B provides that certain deductions are to be allowed on actual payment basis. The proviso to section 43B allows deduction on accrual basis if the amount is paid by due date of furnishing of the return of income.
- The new clause (h) in section 43B provides that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the MSME Act will be allowed as deduction only on actual payment. However, the proviso to section 43B of the Act does not apply to such payments. This can be clarified by way of an example (refer Annexure).
5. Other measures which could be considered
- Other experts such as by Shri B L Chandak[2] have suggested additional measures to resolve problem of delayed payments. Some such measures could be monetary penalty after, say, 60 days of delay. There could be a freeze on the ITC credit of the buyer. If there are still persistent delays, then a threat of GST account suspension could be considered.
- The coverage could be extended to medium enterprises as well as against the protection against delayed payments being made available to only micro and small enterprises.
[2] https://www.thehindubusinessline.com/opinion/gstn-can-resolve-problem-of-delayed-payments/article67842521.ece
6. Conclusion
The problem of delayed payments to MSMEs is a complex and old one. Though, there are many measures in place on paper for around two decades, however, no resolution seems to be in sight.
As like the other measures, section 43B(h) also appears to be a good move on the part of the Government. However, there appears to be a lack on intention on the part of the regulators to execute these measures and save the mSMEs from being sick from delayed realisation of their sale of goods and services.
There have been instances where the mSMEs themselves want the postponement of implementation of section 43B(h). They are going to the extent of cancelling their mSME registration as the buyers who are the large corporates are withholding purchases on account of the statutorily shortened credit period.
Further, there have been instances where the mSMEs have not gone to the FC citing reasons that all the business from the large corporates will dry up. In other cases, where the mSME have gone to the FC (usually when it is a do-or-die situation) and received a favourable order from the FC, they are still running from pillar to post to get their favourable order executed. This has happened not only in the case where the buyers are private companies but also in case of large Government companies. It seems very ironical that the FC which is a Government created body gives a favourable order but the Government company does not execute it. To further the harassment, in such cases there is both loss of business and loss of money. The mSMEs do not see the principal recovery, leave alone the interest, thus making the provisions look only pretty on paper.
To resolve the problem of delayed payments, just as the slew of measures are important, it is necessary to also have the intent and will to resolve the problem. Will section 43B(h) will actually help in resolution or will be another addition to the list only time will tell?
Annexure
| Date of acceptance or deemed acceptance | Credit period | Agreement/ No Agreement | Due date of payment | Payment made (Date of payment) | Allowance under section 43B(h) | Remarks |
| 15 March 2024 | 15 days | Agreement | 31 March 2024 | Y (31 March 2024) | Y – FY 2023-24 | – |
| 15 March 2024 | 45 days | No agreement | 30 April 2024 | Y (30 April 2024) | Y – FY 2024-25 | The appointed day is 31 March 2024. Section 15 MSME Act provides that where there is no agreement, payment has to be made before the appointed date. |
| 15 March 2024 | 60 days (will be reduced to 45 days as per proviso to S.15) | Agreement | 30 April 2024 | Y (15 June 2024) | Y – FY 2024-25 | As per proviso to section 15 of MSME Act, the period agreed between the supplier and buyer should not exceed 45 days |
SME BOTS 