MSMEs get a cash flow boost from the Budget

The country’s micro, small and medium enterprises (MSMEs) got a shot in the arm with the government introducing an amendment that will ensure that buyers can claim income tax deduction only on actual payments made to a MSME supplier. For example, if Maruti Suzuki or a PSU buys ₹100 crore worth of raw materials from a clutch of small suppliers, the companies cannot claim the expense till the payment is finally made.

The government will insert a new Clause (H) in Section 43B of the Income Tax Act that any sum payable by an assessee to MSME beyond the time limit (45 days) specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 shall be allowed as a deduction only on actual payment. The amendment will, however, take effect from April 1, 2024, that is, from FY25.

Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises (FISME), the biggest umbrella organisation of MSMEs in the country, said the provision will help improve cash flow of small firms as now both government and private players will have to make timely payments within a quarter. In fact, there was rampant exploitation by buyers as they were only making part-payments just to ensure that the enterprises can pay the GST dues, while the balance payment would take more than a quarter. “Now, things will be much better,” says Bhardwaj. “This is the best thing that the budget could have done as timely payments will ensure that MSMEs are no longer at the mercy of their clients,” adds Rajiv Chawla, chairman, IamSMEofIndia.

Yet another boost for small enterprises has come from the Credit Guarantee Scheme, whose term has been further extended with an additional infusion of ₹9,000 crore. The finance minister Nirmala Sitharaman said the infusion will enable collateral-free credit of ₹2 lakh crore loans to MSMEs. “At a time when interest rates are rising, the infusion will help MSMEs to get funds either as working capital or capex without having to offer fresh security. All loans under the scheme will also be cheaper by 1%,” says Chawla. The proposed scheme will take effect from April 1, 2023. The government had introduced the Emergency Credit Line Guarantee Scheme (ECLGS) in the pandemic year of 2020, and later extended the date to March 2023 against its earlier deadline of March 2022.

Mir Junaid, president, Jammu and Kashmir Workers Party, welcomed the budget. “Collateral free funds worth ₹2 lakh crore will go a long way in providing relief to the Covid-stricken MSMEs and will be an enabler for economic growth. Guarantee will enable the banks to readily lend to the sector at a relative lower rate and all these small businesses will be spared the troubles of providing collateral securities that otherwise is a huge task,” says Junaid from J&K, home to 7.9 lakh MSMEs, and the country’s 20th biggest MSME cluster.

Incidentally, the Reserve Bank of India’s financial stability report had stated that, as of September 2022, ₹2.82 lakh crore was disbursed under the ECLGS to 1.04 crore MSME loan accounts, of which 17.72 lakh accounts (one-sixth) had turned non-performing. Though micro enterprises had availed only a quarter of the loans, their share in overall NPAs was, however, the highest at 93.5% compared with 2.8% for small, and 0.5% for medium enterprises.

Besides the hike in ECLGS, the budget has also stated that suppliers, which were unable to execute contracts during the pandemic, will be able to get 95% of their forfeited amount back from government and state-owned undertakings that they were working with. “A lot of MSMEs had seen their bank guarantees being forfeited for no fault of theirs during the pandemic as none of their agreements had a force majeure clause. While the contour of the scheme is not yet out, it’s a welcome step for stressed enterprises,” says Bhardwaj. There are close to 10,000 such MSMEs who faced the brunt of penalties and forfeitures.

Further, the budget has hiked the turnover limit for presumptive taxation for enterprises to Rs 3 crore from earlier ₹2 crore, provided their cash receipts are not more than 5% of total receipts. With the advent of GST, the ability of under-invoicing has drastically reduced and, hence, the government seems to have taken this step, say industry observers.

“Given the circumstances, the government has done what it could do best for the sector,” says Chawla.