Centre's 45-day Rule Casts Shadow Beyond MSMEs, Experts Sound Alarm

Amid the ongoing tussle between the Modi government and Indian micro, small and medium enterprises (MSMEs) over the 45 days payment rule, industry stakeholders have said that even non-MSME buyers may struggle to comply with the regulation as they would need to secure additional capital to meet the payment deadlines.  

The latest provision in the Income-Tax Act in Budget 2023-24 by the Centre to secure payments to MSMEs within 45 days of the supply of goods or services has led to big corporations cancelling orders to registered MSMEs and placing these with unregistered MSMEs. 

Even non-MSME buyers may struggle to comply with the regulation as they would need to secure additional capital to meet the payment deadlines. However, this "stick" approach doesn't address the underlying issue of the working capital gap, which currently exceeds USD 500 billion," said Manish Kumar, Chief Executive Officer (CEO) and Founder, KredX.

Moreover, India's market dynamics, where buyers hold significant leverage, mean that they may opt to work with non-MSME sellers to avoid adhering to these guidelines. "Consequently, MSME sellers might be compelled to deregister themselves as MSMEs just to sustain their businesses," Kumar added.

In essence, while the government's initiative aims to support MSMEs, industry leaders said that it is essential to address the broader systemic issues, such as the working capital gap, to achieve sustainable solutions that benefit all stakeholders in the MSME ecosystem.

The general fear the MSMEs have is that this provision will lead larger enterprises to bypass small and medium suppliers and instead opt to purchase from unregistered enterprises. 

"This could result in a significant loss of business for them. We believe that this 45-day payment rule could be impractical as far as implementation is concerned as domestic business payout cycles follow a 90-day window, while international cycles can stretch to over 150 days," said Srivatsan Sridhar, Founder and CEO, Skydo, a cross-border payments platform. 

MSME stakeholders worry that in sectors with long supply chains and lead times, especially those in manufacturing and exporting sectors, adhering to a 45-day payment window may significantly impact companies' working capital. 

"And, therefore it could lead to large companies renegotiating contracts with their suppliers, force MSMEs to accept lower margins or absorb additional costs of complying with this rule, replace existing suppliers with new ones or redefine the payment structure to circumvent the 45-day payment rule," added Sridhar. 

KredX's Kumar argues that a significant portion of MSME payments often comes from other MSMEs. This means that imposing strict payment deadlines could equally burden MSME buyers, potentially leading to increased taxes, as payments made to sellers may now be treated as income under the new regulation. 

What To Do? 
According to a report by the GAME, delayed payments have surged to unprecedented levels, amounting to 10.7 lakh crore, approximately 7.8 per cent of the GDP. Effective implementation of the rule holds the potential to significantly ameliorate the cash flow challenges faced by MSMEs, empowering them to invest, expand, and make greater contributions to the economy. Moreover, enhanced clarity and stringent enforcement can foster transparency and accountability in business transactions, fostering a fairer marketplace.

Addressing the substantial working capital gap, which exceeds USD 500 billion in domestic trade alone and significantly more when considering exports, is paramount.

To support MSMEs in managing their cash flow and tackling payment delays, we must streamline working capital financing, particularly in scenarios where both buyers and sellers are MSMEs.

In B2B transactions, buyers typically don't represent the end consumers but rather contribute value along the supply chain before the products or services reach the end user. Therefore, unless the end consumer pays, there's often a delay in payments cascading through the entire supply chain.

As per the industry insiders, financial institutions should prioritize supply chain and trade financing as strategic products. Studies indicate that bridging the working capital gap by just USD 1 million can create 16 jobs. Closing the USD 500 billion gap could generate over 8 million jobs and significantly enhance MSMEs' profitability and satisfaction.

Sridhar added, "Credit Guarantee Scheme, trade receivables discounting system (TReDS) are some government schemes that MSMEs can leverage. The ability of MSMEs to accept electronic payments can expedite collection against the conventional methods of cheques and bank transfers. This can collectively make a substantial difference in the health of the company's cash flow."

Story So Far
The recent regulatory developments, originally slated to take effect last fiscal year, were postponed to this fiscal year due to comprehensive considerations. While the implementation was delayed, the underlying concerns persist.

MSMEs are facing pressure from their buyers, leading some to deregister themselves as MSMEs just to retain business relationships. This trend is particularly noticeable in sectors like textiles, where the repercussions are more pronounced. MSMEs sacrificing their MSME benefits to appease buyers isn't conducive to the broader interests of the country or the long-term sustainability of the sector.

Industry bodies, in their proposals to the finance ministry, have suggested potential modifications to the act or a temporary postponement to allow businesses time to adjust. 

Recently, the Confederation of All India Traders (CAIT), to address concerns regarding Income Tax Law 43(B)H among traders, talked to Finance Minister Nirmala Sitharaman. Praveen Khandelwal, Secretary General, CAIT emphasised the need for greater awareness among traders about this beneficial provision and proposed a one-year postponement of its implementation. This delay, he argued, would allow traders ample time to understand and comply with the law smoothly.

Notably, the media reports suggest that the government is mulling over relaxing the 45-day MSME payment rule in the upcoming July budget. While the 45-day payment rule was intended to alleviate financial strains on MSMEs, some within this sector have voiced opposition to its implementation. 
As the industry seeks a solution that fosters a healthy business environment for MSMEs, stakeholders noted that a one-size-fits-all approach may not be suitable for the diverse landscape of small businesses in India.