45 Days Payment Rule Hurting MSEs Rather Than Benefitting Them

45 Days Payment Rule Hurting MSEs rather than benefitting them

Introduction

In an effort to support Micro and Small Enterprises (MSEs) in India, the Government of India implemented a 45-day payment rule¹, to ensure timely payments from larger companies. It is being reported by media houses that despite its good intentions, this regulation has unintentionally created significant challenges for MSEs². Rather than decreasing financial burden, the rule has led to cash flow issues and difficulties highlighting the need for a more flexible approach. These unexpected consequences have placed many MSEs in difficult financial situations, undermining their stability and growth potential. As these enterprises struggle to navigate the rigid payment structure, it becomes evident that a rule reassessment is necessary to truly support the backbone of India's economy.

Classification of Micro, Small and Medium Enterprises (MSMEs)

Key Points:

1. Applicability: The rule is applicable to all the enterprises, including individuals whose total turnover in the previous financial year exceeded Rs. 50 crore.
2. Purpose of the Rule: The 45-day payment rule was enacted to ensure that MSEs receive payments within 45-days from their buyers. This measure aimed to increase the cash flow issues faced by the small businesses due to delayed payments. For more information refer to Delayed Payments, Lack of Formal Financing in MSMEs Affect Job Creation.
3. Timeframe: Large enterprises are required to settle payments for goods and services acquired from the small and medium enterprises within 15 days (if there is no agreement) and 45 days (if there is written agreement)³.
4. Penalty: If the large enterprise fails to make the payment within the stipulated time, then the expenses cannot be deducted from taxable income, which may increase the tax liability of large enterprises.

Consequences of the 45-days payment rule

1. Cash Flow issues: Instead of ensuring steady cash flow, the rule has led to MSEs facing liquidity problems. With longer repayment cycles needed by large enterprises not being adjusted, MSEs are often left in a precarious financial situation.
2. Reduced Market Share: The rule has made MSEs less attractive to large buyers, who may prefer traders with more flexible payment terms. This shift can lead to loss of business for MSEs, thereby reducing their market share.
3. Pressure on Textile Industry: Different industries have different payment cycles. Textile oriented MSEs face difficulties due to the traditional longer payment cycle. The rule does not take into account the longer time frames.

Conclusion

The 45-day payment rule, although encouraging, has resulted in negative consequences for MSEs. Instead of providing the intended financial relief, it has increased cash flow issues and reduced the market share of the MSEs. In order to encourage MSEs, a more flexible approach that aligns with the operational requirements of these businesses is needed. The Government of India should consider revising the rules to balance the needs of MSEs while taking into account the practical challenges faced by their large enterprises, ensuring that support measures actually benefit the MSEs.

Ritvik kashyap, Junior Associate Advocate at S.S. Rana & Co. has assisted in the research of this article.

Footnotes

1 Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006: Liability of Buyer to make payment, available at: https://www.indiacode.nic.in/show-data?actid=AC_CEN_46_77_00002_200627_1517807324919§ionId=9897§ionno=15&orderno=15

2 Available at: https://economictimes.indiatimes.com/small-biz/sme-sector/is-the-45-day-payment-rule-helping-the-mses/articleshow/110792031.cms?from=mdr

3 https://www.financialexpress.com/business/sme/45-day-msme-payment-rule-effective-from-today-how-buyers-will-be-taxed-on-delayed-payments/3440634/

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