Says retailers dropping order because of amendment to I-T Act on payment to MSMEs
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MSME apparel manufacturers are expected to face a loss of Rs 5,000-7,000 crore in the January-March quarter, according to the Clothing Manufacturers Association of India (CMAI). The association representing the Indian apparel industry cited an amendment to the Income Tax Act that states payments to micro, small & medium enterprises (MSMEs) need to be made within 45 days. This, the CMAI claims, in turn, has pushed retailers to cancel orders with MSMEs and opt for MSME players.
Typically, the retail industry follows a credit day cycle of 90-120 days to make payments; this sometimes even extends to 180 days.
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Last year, Section 43B of the Income-tax Act was amended and Section (h) was added. This stated that any sum payable by the assessee to an MSME beyond the time limit set in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, is eligible for deduction; it comes into effect from the assessment year 2024-25.
According to the amendment, if payments are not done within 45 days, they will count as income and will only become an expense once it has been paid.
“It is common for even well-regarded retailers to follow this timeframe for settling payments. Consequently, the expectation for retailers to amend their business models immediately to accommodate a 45-day payment cycle is highly unrealistic,” the CMAI said in a note.
“Moreover, a significant number of retailers are contemplating the return of unsold merchandise to the manufacturers, thereby absolving themselves of the obligation to pay for these items,” it said.
Rahul Mehta, chief mentor at CMAI explained that retailers will look to place orders with manufacturers that don’t fall under the MSME bracket and where they don’t have to comply with payments being made within 45 days.
The CMAI has submitted its recommendations to Union Finance Minister, Nirmala Sitaraman and has requested the government to withhold the implementation of the amendment and introduce a reduction in credit days over a period of three years.
It has asked for the reduction to be made to a maximum of 90 days by March 31, 2025, followed by 60 days by March 31, 2026, and 45 days by March 31, 2027.
It has also asked to exempt payments from one MSME member to another MSME member from the ambit of this amendment.
“Genuine and reliable buyers, with positive intentions, may gradually adapt their business models to the shortened credit period, fostering a more transparent and compliant business environment under Section 43(B)(h),” the CMAI said in a note.
Masand said: “The protracted issue of delayed payments within the MSME sector has long hindered its growth, and it is commendable that the government has taken steps to tackle this systemic challenge.”
“Despite the government’s sincere efforts to alleviate the challenges faced by the MSME sector, the unique intricacies of the garment sector have given rise to apprehensions. Issues, such as the cancellation of orders from retailers have started to emerge, raising concerns within the industry,” he added.
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