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Issues Faced by MSMEs


The Union Budget 2023-24 implemented a new provision in the Income-Tax (IT) Act to ensure prompt payments to micro, small, and medium enterprises (MSMEs) within 45 days of the supply of goods or services. However, an unexpected consequence has arisen from this provision. Large companies are reportedly canceling orders placed with registered MSMEs and transferring them to unregistered ones.


GS III: Indian Economy

Dimensions of the Article:

  1. MSMEs in India
  2. Government Initiatives to Boost MSME Sector
  3. Understanding the Latest Tax Compliance Guidelines for MSMEs
  4. Concerns Raised by Big Companies and MSMEs

MSMEs in India:

  • Key Contributors to Economy: MSMEs play a pivotal role in India’s economy by significantly contributing to employment generation, exports, and overall economic growth.
  • Employment and GDP Contribution: They provide over 11 crore jobs and contribute approximately 27.0% to India’s GDP.
  • Scale and Employment: With around 6.4 crore MSMEs, including 1.5 crore registered on the Udyam portal, they employ around 23.0% of the Indian labor force, making them the second-largest employer after agriculture.
  • Manufacturing Output and Exports: MSMEs account for 38.4% of total manufacturing output and contribute 45.03% to the country’s total exports.
Significance of MSMEs and Challenges:
  • Inclusive Growth: MSMEs promote inclusive growth, financial inclusion, and innovation.

Challenges Faced:

  • Dwarfs vs. Infant Firms: Dwarfs, despite their longevity, contribute less to job creation and economic growth compared to infant firms.
  • Informal Funding: Around 90% of MSME funding comes from informal sources.
  • Technological Integration: Adoption of Industry 4.0 technologies like big data, AI, and virtual reality is still in its early stages.
  • Cleantech Innovation: Lack of innovation and entrepreneurship in cleantech, hindering the transition to a circular and low-carbon economy.

Government Initiatives to Boost MSME Sector:

  • Policy Focus: The government has prioritized MSME ecosystem development for achieving Atma Nirbhar Bharat (self-reliant India).
  • Make in India Campaign: The Make in India campaign aims to elevate India in the global manufacturing landscape.
  • Production Linked Incentives (PLI) and ZED Certification: Schemes like PLI and ZED certification promote sectoral growth and quality enhancement.
  • Prime Minister’s Employment Generation Programme (PMEGP): PMEGP fosters self-employment and microenterprises, supporting over 7 lakh economically viable ventures.
  • Digital Initiatives: Digital Saksham initiatives and interlinked portals like Udyam, e-Shram, NCS, and ASEEM facilitate targeted digitalization for MSMEs.

Understanding the Latest Tax Compliance Guidelines for MSMEs:

  • Standard Business Recording: Businesses in India typically record expenses when they occur (accrual basis), irrespective of payment status.
  • Compliance Regulations: The MSMED Act 2006, along with the newly enacted Section 43B(h) of the IT Act, mandates payment to MSME Registered Enterprises within 15 days, or up to 45 days with an agreement.
  • Tax Implications: Failure to comply results in the inability to deduct these payments as expenses in the same fiscal year, potentially increasing taxable income and business taxes.
  • Interest Penalties: Late payment to MSMEs subjects the payer to pay interest on the outstanding amount.

Concerns Raised by Big Companies and MSMEs:

  • Tax Liability Concerns: Larger companies express worries about increased tax liabilities, while MSME owners report order cancellations due to the new tax clause.
  • Shift to Unregistered MSMEs: MSMEs highlight the trend of big companies redirecting business to unregistered MSMEs, allowing them to bypass mandatory provisions and extend payment cycles to 90-120 days.
  • Legal Actions and Ministry Intervention: Some MSME associations have approached the Supreme Court against the regulation, prompting the Union MSME Ministry to engage with industry stakeholders for resolution.
  • Stakeholder Engagement for Solutions: The Ministry invites suggestions from stakeholders to address issues stemming from the I-T Act and propose alternate mechanisms for timely settlement of MSME bills.

-Source: Indian Express

May 2024