On their part, large companies are unhappy about the new norm as it would disrupt their working capital and cash flows. The penalty (in the form of denial of tax deduction) for delayed payments would lead to their money getting blocked for more than a year.
When Section 43B(h) of the Income Tax Act comes into effect, companies have to make payments to MSME vendors within 45 days. If the payment is not made in the specified time, companies will not be allowed to claim the deduction. The buyer will have to pay tax and the overdue amount is subjected to taxation. It will be reversed only after payments if and when payments are made.
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Deepak Karandikar, president, Mahratta Chamber of Commerce, Industries and Agriculture (MCCIA), an industry body in Pune, where there are 25,000 MSME units, says for the last 18 years the MSME sector has been flogged as nobody pays. Karandikar says they have been bullied and made to bear the burden of working capital, forced to borrow at high interest rates from the market to keep their business afloat. According to Karandikar, there are around 33 lakh manufacturing MSME units and the cumulative overdue payments would be around Rs 10.7 trillion, with the public sector accounting for 69% of the dues. He worries about the status quo remaining unchanged and companies opting to pay tax. The biggest beneficiary would be the government as they are likely to see buoyancy in tax collection, he adds.
SMEs are caught in a catch-22 situation, says H P Srivastava, vice chairman of the Deccan Chamber of Commerce, Industries and Agriculture. Steps taken to address delayed payments could end up hurting their business as companies could avoid buying from this segment and look for alternatives and this would defeat the whole purpose of addressing problems of the sectors, warns Srivastava. If it is a product that can be easily replaced and sourced from other suppliers, companies could opt for that, Srivastava said. The machinery to recover payments and penal interest needs to be strengthened as it was very cumbersome and time-consuming with tends of thousands of cases pending and no time-bound disposal of cases, he suggests.
Anil Mittal of the Vasant Group says the buzz around the payment rule change has already led to some positive outcomes in the form of reduction in time taken for payments coming from 80-90 days earlier to around 65-70 days. He was worried about the prospect of having to pay his vendors in 45 days but not receiving his dues from larger companies. Mittal would have preferred a year’s delay in implementing the new changes as it would give everyone time to streamline processes and adapt to the new regime, or else the system would get stressed. Mittal expects the implementation to be difficult for everyone in the ecosystem.Rajeev Bhagwat, CFO, Delaval Flow, said the general mood among industry peers was that they would look to reduce the sourcing from small and micro enterprises to the extent possible and go to the small units only if there was no other suitable supplier. This could defeat the whole purpose of helping small and micro units, he says. His company depended on small suppliers for around 65% of their supplies. According to Bhagwat, the company and their suppliers should have been able to operate their business based on their contracts, and only if they default and fail to honour the contract, should the new rules come into play. The 45-day schedule was arbitrary, especially as the turnaround time was longer and the average payment cycle is 110-115 days, he adds.
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Pradeep Bhargava, who has led multiple manufacturing companies, says larger companies cannot buy from each other. “To avoid payment within 45 days, you cannot run away from the fact that those items are ultimately made manufactured and supplied by small and medium enterprises. Certain goods are optimally made only by SMEs, ” Bhargava said. “Bringing in intermediaries will only transfer the responsibility of payment to the third party and this is not a sustainable option,” warns Bhargava. He wonders how long their alternative suppliers will be able to do this and expects any shift to alternative vendors to be a short-term move. According to him, the large OEMs such as Tata Motors, Bajaj Auto and the Mahindra Group are among those making timely payments and adhering to the schedule, but the Tier-1 and 2 companies and the Indian-MNC JVs blatantly flouted the rules.
Meanwhile, Pimpri-Chinchwad Chamber of Industries, Commerce, Services, and Agriculture, has written to the finance minister requesting a deferment of the new rules as they were difficult to comply with. They expressed concern over the impact of this compliance on their fund flows. Further, they want the government to reconsider the interest on delayed payments under Section 16 of the MSME Act. The companies have to pay three times the bank rate as interest to suppliers, which they said was harsh and not reasonable. They want the normal bank rate compounding interest to be levied for delayed payments.
For some small-scale industries, it was also about their standing in the close-knit community of businessmen. Credit was based on trust and long-standing relationships, a packaging company owner who supplies to automotive companies said. For them, maintaining these connections was far more important than enforcing rules and causing any disruptions or displeasing community members, he adds.