NEW DELHI
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The government introduced a tax provision last year to prod large corporations into paying their micro and small enterprise vendors in time, only to hear concerns that it could backfire on the intended beneficiaries.
It’s now looking to modify how large companies are taxed for delayed payments so that they do not decide to sidestep smaller vendors altogether to avoid the stringent tax treatment, said two officials aware of discussions in the government.
“The government is looking into the concerns raised by the stakeholders and a practical solution will be found,” one of them said, adding that a modification would likely be part of the Union budget proposals for 2024-25 to be announced next month.
The new provision is effective from the assessment year 2024-25, which relates to the income earned in 2023-24.
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The response from small businesses to the tax treatment for delayed payments was mixed.
A survey by the India SME Forum showed that out of 77,382 respondents from the micro, small and medium enterprises (MSME) sector, 69,253 were in favour of the provision while 4,092 members sought modifications and another 4,037 wanted it to be revoked.
“While the intention of the provision is laudable, it will require time before the industry that works with MSMEs can adjust to the specific timelines provided,” said Sameer Gupta, India tax leader at consulting firm EY. “It would be pragmatic if a flexible solution is adopted.”
Emails sent to the spokespersons for the finance ministry and the Central Board of Direct Taxes (CBDT) on Thursday seeking comments on the discussions remained unanswered.
A possible tweak
The Finance Act of 2023 prescribed that companies be allowed to record delayed payments to micro and small enterprises as an expenditure deductible from their taxable income only in the year of the actual transaction.
Allowing deduction on an accrual basis—that is, in the year when the payment liability arose—would be allowed only if the payment was made within the specified time limit.
The MSME Development Act MSME of 2006 mandates that payments to micro and small enterprises be made within 45 days if a transaction is backed by a written agreement. Otherwise, the payment has to be made within 15 days.
Policymakers, however, became worried that while the provision was meant to encourage timely payments to small businesses, large companies could refuse to do business with them because of it.
Gupta of EY said the government could align the treatment of payments to micro and small businesses with that of other specified cases that allow for such payments to be deductible in the year of accrual if the transactions are made by the tax filing due dates.
Tax return filing due dates fall in the subsequent financial year.
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“There are some instances of corporations not preferring to deal with small businesses, but the 45-day payment rule should continue so that it encourages timely flow of finance in the supply chain,” said Chandrakant Salunkhe, founder and president of the SME Chamber of India.
The chamber is seeking measures such as collateral-free loans up to ₹15 crore for small businesses, incentives for small exporter manufacturers, and financial support for struggling small companies in the upcoming Union budget.
Pressure on MSMEs
“There is a need for such stringent rules,” added Vinod Kumar, president of the India SME Forum, while acknowledging that there was pressure on small businesses because of the new provision.
“Post the introduction of the new norm, there have been a few instances where large companies which source goods and services from smaller businesses have asked these MSMEs to deregister from the UDYAM portal,” Kumar said.
Businesses need to be registered on the UDYAM platform to be classified as an MSME.
Kumar added that MSMEs mostly face issues in sectors such as textiles where businesses deal mostly in cash.