Recognising the need to strengthen the MSME sector, the Govt has introduced innovative measures aimed at enhancing their financial resilience
Micro, Small and Medium Enterprises (MSMEs) constitute a vital sector of the Indian economy, actively engaged in both the service and manufacturing industries. Their significance lies in their substantial contribution to India’s GDP, and the Government aims to elevate this contribution to 50 per cent in the foreseeable future. Consequently, MSMEs are rightfully considered the backbone of the nation’s economy, playing a pivotal role in its growth trajectory by employing millions of unskilled and semi-skilled workers.
In terms of economic output, MSMEs play a significant role. They contribute over 29 per cent to the GDP and account for half of the country’s total exports. Additionally, they are responsible for approximately one-third of India’s manufacturing output. With an employment base exceeding 11 crores, there’s a concerted effort to elevate this figure to 15 crores in the coming years.
Acknowledging the critical role played by MSMEs, both the central Government and the Reserve Bank of India (RBI) have rolled out several schemes to support MSME entrepreneurs. Some notable initiatives include MSME Samadhaan, Udyog Aadhaar, Mudra, ZED Scheme, Make In India, and Stand-Up India.
Despite the provisions outlined in the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006, MSMEs often faced challenges, particularly concerning timely payments from larger enterprises. To address this issue, an innovative provision was introduced in the Finance Act 2023 under section 43B(h) by the then Finance Minister, Nirmala Sitaraman. This provision aimed to strengthen MSMEs by ensuring timely payments from buyers, underscoring their status as growth engines of the economy.
During the COVID-19 pandemic, MSMEs were severely impacted due to constrained credit cycles. To facilitate their recovery post-pandemic, the Government has implemented continuous measures to bolster the MSME ecosystem in India. Notably, the Finance Act 2023’s provision, section 43B(h), extended to amounts payable to micro and small enterprises covered under the MSMED Act 2006. This move was geared towards enhancing the credit cycle of MSMEs, ensuring smoother business operations.
Section 15 of the MSMED Act stipulates the time limit for payments to MSMEs by buyers, emphasising timely settlements. However, the non-utilisation of these provisions in the past was often attributed to the vulnerability of micro and small enterprises vis-à-vis medium and large enterprises. The introduction of section 43B(h) sought to address this disparity, mandating timely payments and penalising delays beyond specified limits.
Under this provision, any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the MSMED Act 2006 would be subject to disallowance. Additionally, interest for delayed payment, set at three times the Repo Linked Benchmark Lending Rate (RBLR), compounded monthly, as per section 15 of the MSMED Act 2006, would also be applicable. It’s crucial to note that the registration of the buyer under the MSMED Act, 2006, is a prerequisite to avail the benefits under section 43B(h). However, this provision does not extend to dues outstanding to traders as per the MSMED Act’s definition of enterprise.
The practical implications of section 43B(h) are manifold. Firstly, it ensures a smoother payment cycle for MSMEs, incentivising large entities to settle dues within the stipulated time frame. This not only ensures their financial stability but also fosters their growth. Secondly, it empowers MSMEs with better bargaining power when negotiating payment terms with larger counterparts, minimizing disputes and legal complexities.
To qualify as micro, small, or medium enterprises under the MSMED Act 2006, specific criteria must be met regarding net investment in plant and machinery or equipment, as well as net turnover. It’s noteworthy that only micro and small enterprises are considered suppliers for section 43B(h), whereas medium enterprises are excluded from its ambit.
The effective implementation of section 43B(h) hinges on various factors, including clear communication between buyers and suppliers, adherence to agreed payment terms, and compliance with regulatory requirements. Furthermore, the provision mandates timely disclosure and reporting by auditors, ensuring transparency and accountability in financial dealings.
In conclusion, section 43B(h) represents a significant step towards bolstering the MSME sector in India by promoting timely payments and strengthening their financial position. However, its successful implementation necessitates collaboration between stakeholders, proactive compliance, and robust enforcement mechanisms. By fostering a conducive environment for MSMEs to thrive, India can unleash their full potential as an engine of economic growth and job creation.
Despite the progressive measures introduced, such as the Finance Act 2023’s provision under section 43B(h), challenges persist in ensuring comprehensive compliance and effective enforcement mechanisms. It’s imperative for stakeholders, including MSMEs, large enterprises, regulatory bodies, and auditors, to collaborate closely to address these challenges and realise the full potential of the MSME sector. Furthermore, the transition from Udyog Aadhaar Memorandum (UAM) to Udyam Registration has been a significant regulatory change impacting MSMEs. The mandatory conversion to Udyam Registration underscores the Government’s commitment to streamlining registration processes and enhancing transparency in the MSME ecosystem. However, ensuring widespread awareness and seamless implementation of this transition remains a critical task.
The availability of financing options tailored to the unique needs of MSMEs is another area requiring concerted efforts. While initiatives like the Mudra scheme have aimed to address the financing gap for MSMEs, there’s a need for continued innovation and expansion of financial instruments to support their growth ambitions effectively.
Fostering an ecosystem conducive to innovation and technological adoption is essential for enhancing the competitiveness of MSMEs in a rapidly evolving global landscape. Initiatives like Make In India and the ZED Scheme provide valuable support in this regard by encouraging domestic manufacturing and promoting quality standards.
In conclusion, while significant strides have been made to bolster the MSME sector in India, there’s a continuous need for proactive measures to address evolving challenges and unlock the sector’s full potential. By leveraging technology, fostering financial inclusion, and promoting an enabling regulatory environment, India can further strengthen its MSME ecosystem and propel economic growth and job creation.
(The writer is a Chartered Accountant & Insolvency Professional; views are personal)
