Clipped from: https://www.thehindubusinessline.com/opinion/fixing-delayed-payments-to-micro-small-enterprises/article66573070.ece
Interconnections between GSTN, IT and Udyam Registration portals should help ease payment issues faced by micro and small units
Many firms are harmed by escalating credit indiscipline, protracted payment delays, fear of opportunistic behaviour, and reduced trade credit flows | Photo Credit: H VIBHU
The government has undertaken various initiatives to promote and ensure timely payments to micro and small enterprises (MSEs). In line with these, Budget 2023 seeks to cover payments made to MSEs under Section 43B of the Income Tax Act, 1961 (ITA).
It envisages that any payment towards purchases from MSEs beyond the payment time limit specified in Section 15 of MSME Act will be allowed as deduction only on actual payment basis. Otherwise, the entire amount will be considered as income under ITA.
As per the existing provisions, buyers are required to make payments to MSEs within the maximum period of 45 days. Any delay would entail penal interest. There are a variety of well-intended legal and regulatory provisions, as well as supervisory and institutional infrastructure, to curb the intractable issue of late payments to MSEs.
These include disallowing penal interest paid for delayed payment to MSEs as deductible expenditure, disclosure of overdue payments and interest thereon in audited accounts of companies, furnishing of half-yearly report by the companies regarding amount of overdue to MSEs and reasons for the same, Samadhan portal for registering complaints of delayed payments and online Trade Receivables Discounting System [TReDS].
Despite these efforts, payment delays persist on a large scale. 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.
Further, median debtor days beyond the 45-day regulatory payment period was 195 days for micro units and 68 days for small units in FY2021. These disturbing statistics and miniscule number of Samadhan cases clearly show the serious limitations of the remedies envisioned by these rules and the institutional infrastructure.
The asymmetry of power between small suppliers and large purchasers coupled with the fear of losing business in the event of late payment complaint, lead to non-reporting, manipulation and circumvention of the provisions. Often, auditors take an escape route through a general disclaimer note stating that MSE data are unavailable with the client.
In addition, the remedies involve time-consuming administrative hassles and a less effective enforcement mechanism, both of which discourage delayed payment complaints filing.
The proposed provision of 43B(h) appears to be comparable to the present regulation on the non-deductibility of penal interest on late payments as expenditure. Some leeway for payment delays under Section 43B(h) also arises out of tax declaration being done at the end of a financial year. In order to improve protection against such leeway, manipulations and non-reporting, it is suggested that the provisions of 43B(h) be linked to the GSTN system.
It enables automatic digital monitoring of late payments in real time. As the Udyam Registration Portal is integrated with both the Income Tax and GSTN systems, it will simplify record sharing with income tax site. Further, the Budget proposes GSTN to join the account aggregator network which will help in data sharing.
For an integrated payment system which provides an economy-wide comprehensive solution to late payments and defaults in the entire trade credit ecosystem, the new provision needs to be extended to all credit-based GST transactions.
Many firms are harmed by escalating credit indiscipline, protracted payment delays, fear of opportunistic behaviour, reduced trade credit flows, higher follow-up cost and lower turnover. The proposed remedy can effectively address these issues. This will create a win-win ecosystem for firms of all sizes, banks, government and overall economic growth.
There could be graded auto-action against a payment delaying or defaulting firm by affecting its credit rating (CIBIL score), banking relationship and market reputation: i) automatic red flagging of trade debtor’s GST account after a 10-day overdue; ii) second red alert if account remains overdue beyond 20 days; and iii) third red flag on the 30th day with digital reporting of late payment to borrower’s bank, CIBIL, Ministry of Corporate Affairs and stock exchanges [in the case of listed firms].
In due course, GSTN may implement a trade credit rating system for firms.
In the light of the Budget proposal, a slightly modified version of the aforementioned idea is suggested.
In the fight against late payments, the interconnections between GSTN, IT and Udyam Registration portals and proposal for inclusion of GSTN system in account aggregator network could be a game-changer.
Initially, some flexibility in the 45 days payment period may be required to stabilise payment system. Without this, some firms may bypass direct purchases on credit from MSEs to escape the regulation. In this, we need to consult with trade and industry to find a practical way-out.
The writer is Ex-DGM, SIDBI
Published on March 2, 2023