45-Day Payment Rule For MSMEs Divides Industry Ahead Of Implementation

The case for timely payments to micro, Small and medium enterprises has garnered steam ahead of its implementation in the new fiscal year. However, industry bodies remain divided on industry preparedness, as some players welcome the move while others voice doubts about its practicality.

Starting April 1, the clock on fulfilling payment obligations to MSMEs will have a 45-day limit. Outstanding dues are expected to be cleared by March 31. Beyond this window, the amount would be considered profit, making it liable for tax payments.

This follows the 2023 budget announcement by Union Finance Minister Nirmala Sitharaman and was subsequently introduced in the 2023 Finance Act, where deductibles can be claimed only after payments have been made.

The government has thought judiciously and the industry should support it, said Manguirish Pai Raiker, Goa state chairman of the Associated Chambers of Commerce and Industry of India.

"As MSMEs, we were very happy when this came about. The old policy had no teeth. So, the implementation of the move is long overdue, as the exploitation of MSMEs has been going on for quite some time now," Raikar told NDTV Profit.

The earlier Micro, Small and Medium Enterprises Development (MSMED) Act of 2006 had the 45-day limit already stated and the penalty was fixed at monthly compounded interest at three times the bank rate notified by the RBI.

"The policy was brought in with good intent, but there seems to be a disconnect in terms of its practicality at the ground level," according to Raman Aggarwal, co-chairman of the Finance Industry Development Council—a representative body of assets and loan financing non-banking finance companies. 

The disconnect alluded to is evidenced by the reported cancellation of orders at the Ahmedabad textile market, which created uncertainty for the value chain. Buyers have resolved to place orders beyond Feb. 16, effectively avoiding the deadline of March 31, according to the Times of India.

"The industry is not really ready for it, as this will cause a liquidity crunch," said Sudhir Sekhri, managing partner of Trend Setters International (India) and chairman of the Apparel Export Promotion Council.

Sekhri's apparel company has been involved in ready-made garment manufacturing over the last four decades. "...It takes time to get credit facility from the banks, as the process of credit limit enhancement (if it is successful) will take 2-3 months. What we need is some kind of breathing time... Say six months to find alternate ways of funding ourselves if this policy is coming into effect," he said.

Ashok Saigal, managing director of Frontier Technologies and CII MSME council co-chair, agreed that the MSMED Act of 2006 had not been effectively enforced.

"This rule now only gives teeth to that legislation. The move is not anything new, as it is an enforcement measure implementing existing provisions."

"MSMEs have always asked to make this law more rigid. However, that does not take away the fact that the other side is that MSMEs themselves can be both buyers or payment receivers. What remains is that most members (of the MSME community) are for making it more stringent," Saigal said.

Here, a middle ground could be that the smaller MSMEs are allowed an exemption, according to Sekhri.

MSMEs include micro and small companies, which also deal with each other as part of the value chain, Sekhri said. "...Perhaps micro companies dealing with other micro/small entities and similarly, small companies dealing with micro/small sized entities could be exempted from this rule."

In the near term, one solution to settle the debate would be to allow existing contracts to play out, said the Finance Industry Development Council's Raman Aggarwal. "What they want (MSME borrowers) is an approach where there is incentive for timely payments rather than penalising action in the event of failure to meet deadlines."

With one end of the industry siding with stricter policy enforcement and the other citing concerns about a credit gap, the onus falls on the vision of the policy and what it hopes to achieve.

While some companies that have moved up from medium to large enterprises would have concerns, eventually they will fall in line, and this would set a standard, according to Manguirish Pai Raiker.

"...MSMEs work with thin margins and if the period of payment gets extended, it eats into our earnings. We hope the bigger units will be more large-hearted and forthcoming in making this reality," he said.