While the government has intended to protect MSMEs and ensure timely payments, this new regulation has raised concerns in the market and has led to the cancellation of orders to MSMEs.

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What’s the Issue ?

The Finance Act, 2023, introduces significant changes with the insertion of clause h in section 43B of the Income Tax Act, strengthening the enforcement of MSME payment regulations

Section 43B(h) reads as under:

3B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

“….

(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :..”

Author’s Note :- Remember it is applicable only on Micro and Small not on Medium Enterprises

Current Audit Regulations requiring disclosures in Audit Reports of Large Non MSME Companies:

  • Section 22 of the Tax Audit Report (Form 3CD): This section already requires auditors to report the amount payable to MSMEs as per the provisions of the MSME Development Act. This likely includes reporting compliance with the 45-day payment rule and any applicable interest charged for delays.
  • Standards on Auditing (SAs): These professional standards issued by the Institute of Chartered Accountants of India (ICAI) guide auditors in performing their duties. SA 580 on Going Concern specifically requires considering risks impacting an entity’s ability to meet its financial obligations, which might include potential cash flow issues arising from delayed payments to MSMEs.

Furthermore, any pending payments owed to MSMEs must be settled by March 31, 2024. In cases where buyers do not follow the new payment timelines, outstanding payments to MSMEs will be regarded as taxable income.

The textile supply chain—accustomed to a generous credit period of 120 days—is now grappling with the repercussions of the new 45-day payment window. In Ahmedabad’s textile markets, the uptick in order cancellations highlights the challenges faced by businesses navigating this transition. 

Similar issues are also arising among chemical traders. Although the typical credit period in the chemical industry is around 60 days, owing to low market demand, this period is often extended.

To Avoid Cancellations of Orders from Large Customers, MSME’s are now cancelling their registrations so as to avoid inconviencience at the ends of their large customers.

Challenges of the 45-day rule:

  • Cancellation of orders: As you mentioned, customers struggling to meet the deadline might resort to order cancellations, impacting MSME income and registration status.
  • Cash flow issues: Forcing immediate payments might strain larger companies’ cash flow, especially when dealing with multiple creditors.
  • Negotiation difficulties: Rigid timelines might hinder flexible payment negotiations between businesses, potentially benefiting neither party.

Potential solutions:

  • Graduated implementation: A phased approach, gradually reducing payment cycles over time, could ease the transition for larger companies and minimize order cancellations.
  • Alternative dispute resolution (ADR): Establishing swift and accessible ADR mechanisms could address payment disputes constructively without affecting MSME registration.
  • Incentivizing timely payments: Offering discounts or early payment benefits could encourage prompt payments without jeopardizing MSMEs’ financial stability.
  • Strengthening credit access: Making credit and financing options more readily available to MSMEs could help them weather delayed payments and maintain operations.
  • Promoting digital payments: Encouraging faster and transparent digital payment methods could benefit both parties and ensure timely settlements.

Additionally:

  • Data and analysis: Gathering data on the impact of the new rule on different business sizes and sectors could inform further adjustments and targeted support.
  • Raising awareness: Educating both MSMEs and larger companies about the new regulations and available resources could promote smoother implementation.

Remember, this is a complex issue with no single perfect solution. A multi-pronged approach, considering the concerns of both MSMEs and larger companies, might be the key to successful implementation and achieving the desired outcome of improving timely payments for small businesses.

Potential Causes of Current Problems:

  • Sudden Implementation: The stricter enforcement of the 45-day rule, while positive for MSMEs, might have caught some larger companies unprepared, leading to cash flow issues and impacting order decisions.
  • Lack of Flexibility: The rigid 45-day timeframe might not account for individual business circumstances, making it difficult for some buyers to adapt, especially when dealing with multiple creditors.
  • Limited Alternatives: While the law encourages written agreements, potential power imbalances can make negotiating flexible payment terms challenging for MSMEs.
  • Awareness Gap: Both MSMEs and larger companies might need more information and guidance on navigating the new rule and available resources to avoid unintended consequences.

Amendments:

Currently, there are no proposed amendments to the 45-day payment rule. However, some potential solutions are being discussed, such as:

  • Phased Implementation: Gradually reducing payment cycles over time could ease the transition for larger companies and minimize order cancellations.
  • Dispute Resolution Mechanisms: Establishing swift and accessible mechanisms to address payment disputes constructively could benefit both parties.
  • Incentivizing Timely Payments: Offering discounts or early payment benefits could encourage prompt payments without jeopardizing MSMEs’ financial stability.
  • Strengthening Credit Access: Making credit and financing options more readily available to MSMEs could help them weather delayed payments and maintain operations.

Navigating reduced credit periods: Tackling challenges with DPO extension

Considering the rise of order cancellations and uncertainties caused by the new payment regulation, early payments or receivable-backed financing is the ideal structure to ensure timely payments to MSMEs, without any incremental burden on the buyers.

With the technological advancements made in the working capital space, suppliers no longer need to incur delays in receiving payments. A wide range of financing solutions are designed to put an end to cash flow issues and maximise business potential.

Leveraging Days Payables Outstanding (DPO) extension is a strategic approach to mitigate cash flow constraints, honour payment commitments, and ensure MSMEs receive payments within the statutory period.

Unlock financial flexibility with DPO extension

DPO (Days Payable Outstanding) extension enables businesses to effectively balance short-term financial obligations with long-term sustainability objectives. They can strategically extend payment timelines without compromising supplier relationships.

The essence of DPO extension lies in its ability to afford businesses additional time to settle outstanding payments to suppliers while preserving liquidity for essential operational expenses. 

Businesses can partner with financiers to secure timely credit for fulfilling payments to MSMEs, with the option to repay the financier at a later time. This way, businesses can effectively optimise their cash flow management while ensuring adherence to regulatory timelines and sidestepping excessive financial strain.

The role of fintechs in expediting payments

At the forefront of innovation, fintech companies are instrumental in ensuring financial sustainability for businesses and cultivating mutually beneficial partnerships with MSME suppliers—paving the way for a more resilient and inclusive business ecosystem.

Businesses can seamlessly navigate compliance requirements by leveraging innovative solutions of fintech companies. They are facilitating DPO extensions for businesses by implementing tech-enabled solutions designed to automate payment workflows, optimise cash flow forecasting, and enhance transparency throughout the procurement and payment cycle. 

Employing advanced algorithms and digital platforms, these fintech solutions enable businesses to set up customised alerts and notifications for impending payment deadlines.

Backed by real-time tracking and monitoring capabilities, businesses can gain actionable insights into their payment obligations, identify potential liquidity bottlenecks, and proactively mitigate financial risks. This tech-driven approach fosters transparency and accountability across the supply chain ecosystem.

Facilitating timely MSME payments

By making it possible for businesses to extend their payables and, at the same time, accelerate payment to suppliers, the fintech solutions available today bring advantages to both buyers and suppliers, including enhanced liquidity and minimised fluctuations in payment timelines. 

Considering how manufacturers often extend payment terms, ensuring suppliers get paid on time is a huge boon. As a result, payments now can be made to suppliers as early as two days versus 60, 90, or even 120 days, which the buying firm often prefers.

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