SMEs divided over impact of new 45-days payment rule. Is it a boon or bane?

The new 45-day payment rule for SMEs, effective April 2024, aims to ease working capital issues. While some SMEs welcome it, others fear adverse impacts on their businesses

In February 2023, Finance Minister Nirmala Sitharaman amended the Income Tax Act as part of the FY24 budget to ensure payments to the Micro and Small Enterprises (SME) sector for goods and services purchased within 45 days. The amendment, effective from April 2024, aims to address the working capital shortages faced by SMEs, which play a crucial role in job creation and exports.

However, the amendment has divided the industry. Certain sectors have opposed the 45-day payment cycle, demanding reconsideration in the final Budget for FY25 to be presented in the second half of July. While most SMEs support the amendment, some fear it may lead big businesses to shift their orders to unregistered SMEs.

An enterprise is classified as micro, small, or medium based on its investment in machinery and annual turnover. A micro-enterprise has an investment in plant and machinery not exceeding Rs 1 crore and turnover not exceeding Rs 5 crore; a small enterprise has an investment not exceeding Rs 10 crore and turnover not exceeding Rs 50 crore; and a medium enterprise has an investment not exceeding Rs 50 crore and turnover not exceeding Rs 250 crore.

Sumit Singhania, Partner at Deloitte India, said that although the change to the tax deductibility rule was introduced to encourage timely cash flows for SMEs, its implementation has raised several issues. “This is because payers are subject to various commercial aspects in addition to ensuring SME eligibility, such as performance-based retentions and provisional year-end accruals/expense bookings,” he added.

Payment challenges

Traders and associations in the food and clothing sectors have opposed the 45-day payment cycle, citing longer payment cycles from their buyers.

Suresh Aggarwal, President of the All India Dal Mill Association, said his association strongly opposed the 45-day rule during the pre-Budget consultation with the Finance Minister. “In rural India, the clothing business has a payment cycle of 90-120 days. The furniture plywood industry and the dal (pulses) industry have payment cycles of 50-60 days. If we do not receive payments within 45 days, how will we make further payments?” he asked.

Clause 43B(h) stipulates that starting from the assessment year 2024-25 (i.e., the financial year 2023-24), buyers can only claim expenses for invoices from micro and small enterprises if paid within 45 days where an agreement exists, and within 15 days if there is no agreement.

VP Vaishnav, President of the Rajkot Chamber of Commerce & Industry, said exporters should be excluded from the payment cycle since most payments are made against documents and letters of credit, which involve a 120-day transaction cycle. “We request a level playing field for Indian exporters compared to exporters from other countries. If the government does not exempt exporters, the 45-day cycle should be extended to 120 days,” Vaishnav noted.

BC Bhartia, National President of the Confederation of All India Traders (CAIT), said SMEs dealing with retail cannot get payments in 45 days and hence need more time. “It is easier for those who deal directly with companies, as they can get payments on time,” he added.

Welcome breather
 

However, most SMEs have welcomed the rule change.

"The 45-day payment rule has become a boon for small and micro enterprises. For the first time, we are seeing timely payments, which will help us pay our labourers and invest in new equipment," said Vinod Karwa, Chair of the MSME Committee at the PHD Chamber of Commerce and Industry.

A survey conducted by the India SME Forum (ISF), a non-governmental, not-for-profit organisation for small and medium businesses, found that 93 of its 102 council members support the new rule, with 5 members suggesting modifications and 4 members advocating for dropping the amendment altogether.

"For two decades, we have tried to get buyers to adhere to the 45-day limit, and delayed payments have become a curse for SMEs. This provision in the IT Act is a timely step by the government and will be highly beneficial to the entire micro and small entrepreneurial ecosystem in India," said Vinod Kumar, President of the India SME Forum.

Business Standard reported on June 18 that the Ministry of Micro, Small, and Medium Enterprises (MSME) has received “positive” feedback from the industry regarding the implementation of the 45-day payment cycle for SMEs. However, an official noted that any change in the finance bill is the prerogative of the finance ministry.

Ashok Saigal, Co-Chairman of the CII National MSME Council, said, "Our findings indicate that actual manufacturers and enterprises are very happy with this clause. We specifically asked small and micro manufacturers if they had lost any business due to this, but they told us that nothing as such has happened so far."

How the Finance Minister addresses the opposing concerns in the upcoming budget will be keenly watched.