The introduction of Section 43B(h) in the Income Tax Act (ITA) in FY 2024 has created some concerns and uncertainties in the businesses.

However, it is a significant addition to the existing measures designed to safeguard micro and small enterprises (MSEs) against delayed payments. It stipulates that deductions in taxable income for purchases or services from MSEs are allowed only when payment is made within the specified time limits (15-45 days) as per the MSME Act, 2006.

Currently, businesses face challenges of prompt compliance and operational and financial adjustments by March 31, 2024. The task of balancing receivables and payables within this timeframe is causing unease and concern across businesses; small, large and traders. Notably, the Section 43B(h) benefit does not apply to traders. Its applicability is uncertain for unaudited firms.

In response, some industry associations are urging postponement of its implementation. Some businesses are considering either cancelling their MSE registration or transitioning to trader status. This is because buyers are withholding purchases from MSEs on account of the time limits applicable for payment.

Though regulatory provisions dealing with late payments have been in place since the 1990s, human participation in compliance and administering these provisions adds complexity, leading to non-compliance.

The power imbalance between small suppliers and large buyers and mutual business interests hinders effectiveness of the provisions.A survey by Dun & Bradstreet and Global Alliance for Mass Entrepreneurship (May 2022) estimated that ₹10.7-lakh crore is annually struck in delayed payments to MSMEs, with 80 per cent of this amount related to MSEs. Section 43B(h) is a partial solution, susceptible to potential circumvention and risk of concentrated year-end compliance.

An integrated, self-directed holistic solution, applicable across all businesses, is required by leveraging digital technology, namely the GST network, to minimise human intervention.

A digital framework can be leveraged to bring in an automated payment monitoring process.

Key features

* Incorporating the payment due date and payment receipt date fields in the GSTN portal is essential to create the foundational base for the proposal.

* Automated graded red-flagging in trade debtors account after a grace period of 10 days, categorised as 1st, 2nd, 3rd, and 4th red-flagging on 11th, 21st, 31st, and 61st days respectively from due dates,

* The 3rd red-flagging triggers digital credit default report transmission to CIBIL, banks, Corporate Affairs Ministry, and stock exchanges. This can prompt units to make timely payments to protect their reputation.

* Monetary penalties after 60 days of delays and threat of GST account suspension after 90 days of persistent delays can be considered.

* Digitized integration between B2B credit-based supply chain financing and corresponding repayment flows without limiting it to MSMEs can ensure that the strength of the payment system is intricately connected to the susceptibility of any unit, large or small.

* Timely receipt of receivables enhances its perceived collateral value which can potentially replace asset collateral or guarantee requirements and thereby boosting cash flow-based lending, factoring, and invoice discounting.

* The proposed system enables nearly real-time detection and prevention of various banking advance frauds. It mitigates payment delays, a big factor in financial distress for MSEs, contributing to better NPA management for banks.

Beyond the constraints of section 43B(h), the proposed alternative, grounded in the GSTN digital framework can be a game-changer.

The writer was DGM, SIDBI

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