New Income Tax Provision Causes Business Turmoil.

A recent change to the Income Tax Act, implemented during the Budget 2023-24, sought to improve timely payments to micro, small, and medium-sized enterprises (MSMEs). However, according to a report by The Indian Express, this approach has backfired, resulting in considerable losses for registered MSMEs and raising worries among industry stakeholders.

Tax Clause Affects Payment Timelines

The provision, inserted as clause (h) to section 43B of the Income Tax Act, requires that any payment due to a micro or small firm after the required term of 45 days, as described in section 15 of the MSME Development Act 2006, be tax-deductible upon actual payment. Consequently, customers who fail to reach this deadline would be subject to pay taxes.

Shift in Business Dynamics

Since its implementation, numerous registered MSMEs have reported canceled orders from huge businesses, which are now transferring their business to unregistered MSMEs. This strategy adjustment allows these firms to avoid the statutory 45-day payment period, allowing them to operate on extended payment cycles of 90 to 120 days.

The government engages stakeholders for solutions.

In response to growing concerns, the Union Ministry of Finance has begun consultations with industry stakeholders to address the issues posed by this new tax clause. Suggestions have been asked for alternate approaches that ensure prompt clearing of MSME bills while limiting the negative impact on firms.

Data highlights the severity of the situation.

The MSME Ministry recently released data revealing that, while millions of MSMEs have registered on various platforms, a considerable percentage have chosen to cancel their registrations owing to business closures. The data highlights the gravity of the issue, with cancellations affecting the manufacturing, trading, and service sectors.

Call for Balanced Policy Measures.

As stakeholders cope with the consequences of the new income tax clause, authorities must maintain a balance between supporting timely payments to MSMEs and protecting the interests of all stakeholders in the business ecosystem. Effective coordination and careful modifications are required to create a climate that promotes the growth and sustainability of MSMEs in India.