Government Mulls New Measures for MSME Payments: Interest Charges and Turnover Levies on the Table

The Indian government is exploring a robust set of new measures to tackle the critical problem of delayed payments to Micro, Small, and Medium Enterprises (MSMEs). Discussions are underway between the Ministry of MSME and the Ministry of Finance to amend the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Key proposals include mandating automatic interest accrual on payments overdue beyond the standard 45-day period, unless a longer payment term is explicitly specified in a contract.

Furthermore, a significant penalty is being considered in the form of a levy amounting to 2% of the turnover of large buyers who fail to comply with payment timelines. This contrasts with the current system, where interest and penalties only trigger after an MSME formally files a complaint.

Delayed payments currently represent a staggering ₹9 trillion annually, impacting approximately 71.4 million registered MSMEs, which are vital to India's economy, contributing around 30% to GDP and 45% of total exports.

Other regulatory measures being examined include mandatory quarterly reporting of payment days and interest paid to MSMEs in corporate filings, and introducing compensation per invoice for micro and small businesses, aligning with global practices.

The Finance Act 2023 already introduced Section 43B(h), which disallows expenses for payments delayed beyond 45 days to MSME suppliers from being deducted in the same fiscal year, thereby increasing the taxable income for defaulting businesses starting April 1, 2024.

Global benchmarks from countries like the Netherlands, the EU, and the UK, which enforce strict payment terms, are being studied for implementation.

Impact

Rating: 8/10

This news is highly impactful for the Indian stock market and Indian businesses, especially the MSME sector. It aims to significantly improve the financial health and working capital management of millions of micro, small, and medium enterprises, which form the backbone of the Indian economy, contributing substantially to GDP and exports. By mandating interest accrual and introducing penalties for delayed payments, the government is attempting to create a more equitable business environment. Large corporations and government entities that are often the defaulters will face increased financial pressure to expedite payments, potentially leading to better cash flow visibility for MSME suppliers. This could reduce the need for MSMEs to seek expensive credit, thereby improving their profitability and sustainability. For the stock market, while no specific stocks are directly named as impacted, companies with significant MSME supply chains might see improved operational efficiency and reduced supply chain risk for their partners. The overall economic sentiment for the SME sector could improve, encouraging investment and growth.

Difficult Terms

• MSMEs (Micro, Small and Medium Enterprises): Businesses classified based on their investment in plant and machinery or equipment and annual turnover.
• MSMED Act, 2006: The Micro, Small and Medium Enterprises Development Act, 2006, is a legislation in India that provides legal framework and development support for MSMEs.
• UDYAM portal: An online registration portal for MSMEs in India, simplifying the registration process.
• Levy: A tax or fee imposed by a government or authority.
• Turnover: The total amount of sales or revenue generated by a business over a specific period.
• Compound Interest: Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.
• RBI (Reserve Bank of India): The central bank of India.
• Finance Act 2023: An act passed by the Parliament of India that includes amendments to various tax laws.
• Section 43B(h): A tax provision under the Income Tax Act that disallows deduction of expenses for payments to MSMEs if not paid within the specified time.
• Taxable Income: The portion of an individual's or company's income that is subject to taxation.
• Mandatory Ageing Analysis Reporting: A requirement for businesses to report the breakdown of outstanding invoices based on how long they have been overdue.
• Corporate Filings: Official documents submitted by companies to regulatory bodies.
• Global Standards: Best practices and regulations observed internationally.
• Netherlands, European Union, UK: Countries and a regional economic bloc with established regulations for timely business payments.
• Statutory Maximum 30-day Payment Term: A legally enforced maximum period for making payments after receiving an invoice.
• Business-to-Business (B2B) transactions: Commercial transactions between two businesses.
• GST (Goods and Services Tax): A consumption tax levied on the supply of goods and services.
• Cash Flow: The net amount of cash and cash-equivalents being transferred into and out of a business.
• Working Capital: The difference between current assets and current liabilities, representing the funds available for daily operations.
• India SME Forum: A not-for-profit organization advocating for the interests of small and medium enterprises in India.
• Online Dispute Resolution (ODR): Using online platforms to resolve legal and commercial disputes.
• Micro and Small Enterprises Facilitation Council (MSEFC): State government bodies established to facilitate the resolution of delayed payment disputes for micro and small enterprises.
• Arbitration, Mediation, Conciliation: Methods of alternative dispute resolution (ADR) outside of traditional court litigation.