New Income Tax Provision Creates Unintended Consequences for MSMEs
A new provision in the Income-Tax Act aimed at ensuring timely payments to MSMEs within 45 days has led to unintended consequences. Large companies are canceling orders with registered MSMEs and placing them with unregistered ones to avoid the new tax rule.
This has prompted MSME associations to approach the Supreme Court and the Union MSME Ministry to seek solutions. Stakeholders are suggesting ways to address the issues and recommend alternative mechanisms for timely MSME bill clearance.
The new rule, intended to promote timely payments, stipulates that any payment exceeding the 45-day limit will only be allowed as a deduction upon actual payment, leading to increased tax liabilities for larger companies. This has also resulted in order cancellations and a shift towards unregistered MSMEs, who can offer longer payment cycles.
The Union Ministry of Finance is considering tweaking the rule, with businesses requesting a deferment or extension of the 45-day limit. The Confederation of All India Traders has also called for a suspension of the provision until sufficient clarification is provided.
Data shows that 2.28 crore MSMEs registered on the Udyam portal between July 2020 and January 2024, while 1.28 crore micro enterprises registered on the Udyam Assist Platform between January 2023 and January 2024. However, around 35,396 MSMEs cancelled their Udyam registration due to business closures during this period, with the majority from the manufacturing and trading sectors.