Delays in payment of MSMEs

Source-This post on Delays in payment of MSMSEs has been created based on the article “MSMEs are not paid on time. They need to be” published in “The Indian express” on 7 May 2024.

UPSC Syllabus-GS Paper 3– Changes in Industrial Policy and their Effects on Industrial Growth.

Context– MSMEs are a crucial part of the Indian economy, accounting for a significant share of the country’s manufacturing output, exports, and employment. The article highlights the hardship faced by MSME particularly related to lack of access to credit and delayed payments. Delays in payment of MSMEs

What are the steps taken by the government to address the issue of delayed payments?

Micro and small enterprises account for most of the annual delayed payments, as shown by several studies.

1) The government has taken steps to address this issue, such as launching the Samadhaan portal to monitor outstanding dues to MSMEs.

2) In the Union Budget 2023-24, the government introduced a provision to ensure timely payments to MSMEs within 45 days of supply of goods and/or services. This is aimed at addressing the typical payment cycle of 90 to 120 days.

What are the unintended consequences of this new provision introduced in Union Budget 2023-24?

1) Higher Tax Burden for Big Companies-The recent regulation permits larger companies to deduct payments to these enterprises from their taxes only once the payments have been made. If they’re not allowed to deduct these payments from their tax returns, it would lead to a rise in their tax burden.

2) Cancelling Orders with MSMEs -Big companies are trying to circumvent this rule by canceling orders with registered MSMEs because they prefer longer payment schedules.

3) Orders from Unregistered MSMEs-They are currently sourcing orders from unregistered MSMEs, as it provides them with increased operational flexibility.

4) Influencing Suppliers to Revoke MSME Registration– Big companies are attempting to compel suppliers to withdraw their MSME registration because of their significant bargaining power.

5) Impact on MSME Registration– MSMEs are opting to deregister to avoid losing orders from big companies. By the end of last year, the total number of MSMEs registered on the Udyam registration portal was 316 million, with 150 million informal micro-enterprises registered on the Udyam Assist Platform.

Read more- MSMEs: Significance, Challenges and Solutions

What has been the government’s response to deal with this unintended consequence of the new provision?

1) The government has begun discussions with stakeholders to explore potential solutions for addressing the problems.

2) The government has sought suggestions on ways to ensure timely clearance of MSME bills.

Question for practice

Highlight the unintended consequences of the new provision introduced in Union Budget 2023-24 to expedite the payment process for the MSMEs?