Table of Contents

Introduction

Micro, Small, and Medium Enterprises have a pivotal role in today’s dynamics related to a growing economy. These enterprises serve as prime sources of creating employment opportunities and indulging innovation to contribute to the GDP of India. However, most MSME vendors face a common and big issue of delayed payments, which has further posed several challenges to the respective sector.

Irregular payment cycles may lead to crippling effects on MSME enterprises and hamper their overall growth. In some cases, delayed payments push MSMEs into big debt traps. Furthermore, delays in payments disrupt cash flows and create an adverse effect on the enterprises’ operational sustainability, into a vicious cycle of debt and borrows.

Considering the circumstances, MSMEs should understand the legal framework associated with regulating and mitigating payment delays. Once MSMEs are familiar with the legal framework, they should understand the Indian business landscape. Accordingly, enterprises must adopt financial re-engineering strategies to overcome the financial landscape complexities. 

MSME Development Act for MSMEs

MSME Development Act is the acronym for Micro, Small, and Medium Enterprises Development Act. The act secures the interests of every small, micro, and medium business enterprise. Before you find the legal remedies for the New Financial Year, you must develop perspectives on certain legal remedies bestowed on the following enterprises- 

Section 15

Section 15 outlines the payment terms to be received by an MSME vendor. It stipulates the payment period of an invoice agreed in writing should not exceed 45 days from its acceptance day or the day of its deemed acceptance. In contrast, if there is no written agreement, the MSME must receive its payment within only 15 days. 

Section 16

Section 16 highlights the consequences of any delayed payment. Accordingly, if there is a payment delay beyond the stipulated period, the buyer becomes liable to pay a compound interest to his supplier right from the appointed day. Here, the Appointed day starts from the following day after 15 days when the day of deemed acceptance or acceptance expires. 

The Inclusion of Companies Act 2013 with the Rules of MSME Payments

The Companies Act 2013 also worked with the MSME Development Act to enforce accountability and transparency on companies involved in transactions with MSMEs. According to the act, every company must file an online form MSME-1 with the Company’s Registrar every six months. The company must report its payment details, which exceed the 45-day stipulated period. By doing so, every micro, medium, and small enterprise gets a chance to claim their dues. Besides, the act mandates companies to provide additional disclosures in financial statements about diverse transactions.

A prime factor associated with delay in payments to MSMEs is the debate on whether the accumulated sum should contain the penal interest or the principal amount only. Section 15 to Section 24 of the latest MSME Development Act says that buyers must pay interest only on delayed payments.

However, Section 37 of the Income Tax Act does not allow the penal nature in such cases to denote claims associated with tax deductions as per regular circumstances. The combination of acts thus emphasizes the priority of the principal amount over the interest amount while doing financial transactions with an MSME. 

Financial Bill 2023 and its Amendments on Tax Deductions

The Finance Bill of 2023 has proposed pivotal amendments that are set to change the landscape of MSME vendor transactions. These amendments seek to include payments to micro and small enterprises within the ambit of Section 43B of the Income Tax Act, which dictates the allowance of deductions based on the actual payments made.

According to the modification in Section 43B of the Income Tax Act, any due amount to a small or micro-enterprise beyond the specified time limit prescribed in the MSME Development Act Section 15 will be only the deduction on the payment. 

Tips to Prepare for the New Financial Year as Per the Latest Laws

Every company and MSME unit must gear up to adjust the compulsory implications of the legislative variations discussed here. The adjustment will align both the payment systems and accounting procedures with the latest standards. Along with this, every MSME should consider financial re-engineering associated with the present business landscape in India.

The re-engineering consists of many things than simply adopting local business environment intricacies in India. It must redefine the necessary financial procedures to align with the dynamic MSME sector of India. Moreover, MSMEs must establish the following robust practices to manage their obligations of making and receiving payments efficiently.

Also Read: The Essential Guide to Financial Planning for MSMEs in The New Fiscal Year

Mastery in Cash Flow as Per Indian Business Landscape 

  • Every business should employ a robust mechanism to forecast its cash flow based on seasonality inherent in diverse Indian industries.
  • MSMEs should navigate the challenges related to cash flow by involving in proactive negotiations with their suppliers. Besides, enterprises should focus on exploring the necessary credit schemes backed by the Indian government.

MSMEs in India should essentially understand the seasonality associated with their cash flows, especially if they work in the tourism and agriculture sectors. By proactive engagement with suppliers and leveraging the schemes of the Indian Government, MSMEs may get the necessary financial buffer.

Update in the Existing Accounting Systems

Every enterprise should update its existing accounting system to fulfill the new financial requirement related to identifying deductions on the exact payments without any flaw.

Optimization of Operational Efficiency

MSMEs should essentially conduct cost-benefit analyses regularly to identify and deal with a few unique challenges related to their regular business operations. Simultaneously, the Indian government today organizes many schemes to promote MSMEs, including the latest schemes of Atmanirbhar Bharat and Make in India. The enterprises must use and leverage the respective schemes to access resources and optimize their operations.

MSME Vendor Management

MSMEs should essentially maintain their transparency in communication with their vendors. Whether it is about potential delay or payment procedure, a successful vendor relationship management may develop trust by avoiding certain disputes.

Invest in the Latest Technology

MSMEs should invest in the latest and innovative technology to accomplish their regular operations as follows-

  • Integrate a user-friendly software for bookkeeping and accounting, which should align with the updated Indian tax regulations requirements
  • Explore technological applications to comply strictly with the framework of Goods and Services Tax and simplify the financial reports

Other than that, MSMEs must leverage their e-invoicing system to explore the benefits offered by the initiative of Digital India to streamline their operations and stay compliant.

Also Read: Technology For MSMEs | Adopting Technology for Growth

Compliance Checks 

Every MSME should essentially check and review the compliance of the MSME Development Act while conducting their operational audits.

Diversification and Innovation in the Indian Business Market

Micro, small, and medium enterprises must foster innovative cultures by tapping into the country’s pool of talents, skills, and diverse market requirements. Moreover, MSMEs should explore a few key diversification strategies based on a diverse customer base in India. Only, enterprises should make sure to align their products/service offerings with the preferences of local people.

The logic behind this strategy is that India has a diverse consumer base that demands innovative solutions. Indeed, MSMEs may tap into current market trends and local talents to drive innovation. On the other hand, diversification must align with the initiative of Vocal for Local to promote a variety of indigenous products and service offers.

Strategic Alliances in the Business Ecosystem of India

Micro, small, and medium business enterprises must form strategic alliances with their fellow MSMEs operating in India. Accordingly, businesses will address financial challenges, including the problem of payment delay collectively, and access many big markets.

Furthermore, every business should engage with government bodies and industry associations to negotiate favorable terms only to receive benefits under diverse schemes. Engaging with fellow MSMEs and industrial associations is crucial in the context of India. Collaborative efforts will result in the sharing of resources and easy market access.

Also Read: Crafting Tomorrow: MSMEs And The Blueprint For Success In India

Conclusion

The obligations associated with timely payments to diverse MSME vendors are both a legal mandate and a business ethic to embrace by companies and fellow MSMEs. Other than that, financial re-engineering has a unique significance in the dynamic Indian business landscape. Therefore, by gaining knowledge of certain MSME regulations and adopting financial re-engineering strategies, MSMEs may overcome their financial challenges and set up a strong foundation to sustain growth.

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Eva Mukherjee Content Writer
Eva has expertise in writing content in diverse niches, including the latest rules and norms related to CGST Act, Stock Market and Shares.

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