As we celebrate World MSME Day on 27th June, it is important to highlight how Micro, Small, & Medium Businesses can help growing economies like India to drive growth and opportunities, especially given the shere volume of population it shelters. A crucial amendent was carried out by Finance Minister Nirmala Sitharaman by modifying the Income Tax Act in February 2023 as a component of the FY24 budget to guarantee that the MSME sector receives payments for products and services acquired within 45 days.
As we celebrate MSME day today, let's hear the opinions of India's most influential figures about the 45-Day MSME Payment Rule:
Amit Patjoshi, CEO at Palladium India
It is anticipated that the inclusion of the 45-day payment rule for MSMEs in Section 43b(h) of the Income Tax Act will fundamentally alter the economic environment in India. This clause prevents big firms from deducting costs for products or services they buy from these small businesses if payment isn't received within a certain amount of time.
Companies will also be required to pay interest for such delays at a rate that is three times the current bank rates. The constant problems with working capital that MSMEs have because of late payments would be solved by this regulation. A steady firm is seen favorably by many financial institutions as having timely payments, which facilitates better credit conditions and easier access to financing while also fostering a more equitable and healthy corporate environment.
There is a lot of favorable talk about this regulation among the these tinier businesses, which is one of the most important and necessary initiatives for the sector. But the powers of the market have given us a new insight into this well-considered norm. There's concern that big businesses might place fewer orders with businessses and instead buy from unregistered companies in order to get around this regulation.
During my recent meetings with MSMEs and MSME Associations in Maharashtra, a number of them brought up the fact that exporters and dealers must pay MSME sellers on time even if they do not get payment from their customers on time. This can cause serious cash flow problems. MSMEs frequently avoid filing claims because they believe it will negatively impact their long-term relationships. Instead, they collaborate with larger customers to bring up unpaid invoices or, in the worst situations, change their MSME registration status.
The government should think about enacting a 45-day or 90-day regulation to alleviate these bottlenecks, since they might be more in line with the sector's present credit cycle. To encourage big businesses to follow the MSME 45/90 days norm, they might set an initial interest charge at the going bank rate for late payments, with step rises for successive delays or numerous defaults.
In case the government chooses not to enforce the rule, they could explore alternative and inventive ways to lessen the working capital burden on MSMEs. These could include mainstreaming bill discounting for Micro, Small & Medium Enterprises, offering low-interest working capital loans to businesses whose goods have been accepted but payment is still pending, and enhancing the resources supporting crucial institutional machinery like MSME Samadhaan to guarantee prompt case resolution without enforcing any regulations. “We have faith that the government will act appropriately to guarantee that the requirements of all parties involved are met,” signifies Amit. “We have faith that the government will act appropriately to guarantee that the requirements of all parties involved are met,” he adds.
Mandeep Arora, Co-founder at VingaJoy
A larger program to improve the business climate for MSMEs includes the 45-day payment rule. He said that making sure payments are made on time will contribute to the development of trust between MSMEs and larger companies, which will encourage a more cooperative ecosystem.
Goyal said that this action is in line with the government's goal of turning India into a $5 trillion economy, in which MSMEs are essential.
Lalit Aurora, Co-founder at UBON
The 45-day payment rule, which stipulates that payments to this small scale businesses must be made no later than 45 days, has the potential to greatly stimulate innovation and industry competitiveness. Making sure payments are made on schedule helps MSMEs with one of their biggest problems: managing cash flow. MSMEs are better equipped to deploy resources and concentrate on innovation, product quality, and market expansion when they have a consistent and predictable cash flow.
Innovation frequently requires a large investment of resources, including new technology, trained workers, and R&D expenditures. Furthermore, this businesses can engage in these sectors thanks to guaranteed cash flow, which relieves them of the ongoing worry that their financial stability would be jeopardized by late payments. This may result in the creation of new items, enhancements to current offers, and the use of more effective manufacturing techniques, all of which would raise these businesses' competitiveness.
