Why in News?

The Union Budget 2023-24 introduced a new provision in the Income-Tax (IT) Act that aims to secure payments to micro, small and medium enterprises (MSMEs) within 45 days of supply of goods or services.

However, this provision has resulted in a peculiar problem - large companies cancelling orders to registered MSMEs and placing these with unregistered MSMEs.

What’s in Today’s Article?

• MSMEs in India
• Significance of MSMEs and Problems Faced by Them
• Government’s Initiatives to Boost MSME Sector
• Understanding the Latest Tax Compliance Guidelines for the MSMEs
• What are the Concerns Raised by Big Companies and the MSMEs?

MSMEs in India:

• MSMEs are often called the powerhouse of the Indian economy as they contribute significantly to employment generation, exports, and overall economic growth.
• They reportedly account for more than 11 crore jobs and contribute around 27.0% of India's GDP.
• The sector consists of around 6.4 crore MSMEs, with 1.5 crore of them registered on the Udyam portal and employs around 23.0% of the Indian labour force, making it the 2nd-largest employer in India after agriculture.
• They account for 38.4% of the total manufacturing output and contribute 45.03% of the country's total exports.

Significance of MSMEs and Problems Faced by Them:

• Significance of MSMEs for Indian economy: Labour intensive sector, promotes inclusive growth, leads to financial inclusion and promotes innovation.
• Problems faced by MSMEs:
  • 
  • Problem of dwarfism: While dwarfs (firms that continued to remain small despite ageing) consume vital resources (could possibly be given to infant firms), they contribute less to job creation and economic growth as compared to infant firms.
  • Lack of funding: Most (90%)of the MSME funding comes from informal sources.
  • Poor integration of digital technologies: Integration of technologies such as big data, AI and virtual reality (Industry 4.0) into manufacturing operations in the sector is still in its infancy.
  • Environmental impact: The sector lacks cleantech innovation and entrepreneurship, which produce environment friendly products, promotes energy efficiency and has the potential to accelerate the transition to a circular and low carbon economy.

Government’s Initiatives to Boost MSME Sector:

• The Government of India has correctly identified MSME ecosystem development as a top priority for achieving Atma Nirbhar Bharat (self-reliant India).
• The ambitious ‘Make in India’ campaign in India aims to propel the country up the manufacturing value chain and position it as a global manufacturing hub.
• Production linked incentives (PLI) schemes and the recently launched zero effect zero defect (ZED) certification are assisting in the promotion and growth of the sector.
• The Prime Minister's Employment Generation Programme (PMEGP) is also creating opportunities for self-employment and microenterprises, with over 7 lakh microenterprises being helped to become economically viable.
• Digital Saksham initiatives, as well as the interlinking of the Udyam, e-Shram, National Career Service (NCS) and Aatmanirbhar Skilled Employee-Employer Mapping (ASEEM) portals, demonstrate the promise of targeted digitalisation schemes.

Understanding the Latest Tax Compliance Guidelines for the MSMEs:

• In India, businesses usually record expenses when they happen (accrual basis), even if they haven't paid for them yet.
• However, Section 15 of the MSMED Act 2006, and newly enacted Section 43B(h) of the IT Act says that businesses must pay these MSME Registered Enterprises within 15 days/ up to 45 days if they have an agreement.
• If a business doesn't comply with this regulation, they won't be able to deduct these payments as expenses in the same year they incur them. This means their taxable income and business taxes could go up.
• Also, in case of late payment to an MSME registered unit, the payer will be responsible to pay interest on the amount due.

What are the Concerns Raised by Big Companies and the MSMEs?

• Bigger companies started flagging concerns about ballooning tax liability and many MSME owners reported cancellation of orders due to the new tax clause.
• MSMEs also pointed out that big companies are shifting business to unregistered MSMEs, as it lends them the flexibility to not meet the mandatory provision and continue with a longer payment cycle of 90-120 days.
• While some MSME associations have approached the Supreme Court against the new norm, the Union MSME Ministry is learnt to have reached out to industry players for solutions.
• The Ministry has asked stakeholders to suggest ways to resolve the issues arising from the I-T Act and to recommend possible alternate mechanisms for timely clearance of MSME bills.