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Indian businesses fear higher taxes over unsettled dues to small vendors as March 31 deadline inches closer

Feb 4, 2024

Indian businesses are facing a higher tax outgo due to a new law that requires them to clear outstanding dues to small and micro vendors within 45 days. The law, passed in 2023 and unchanged in the 2024 budget, treats incurred expenditures as income on which tax must be paid for FY 24-25. Many businesses are consulting auditors and tax experts to estimate the extent of the impact and find ways to avoid a tax blow. Some small units are even considering surrendering their 'small and micro' registrations to protect their order books.

Weeks before the financial year ends, millions of businesses in India, large and small alike, are waking up to an accounting alarm.

They are coming to grips with a situation where profits will be dented by a new law to be triggered on March 31: businesses will be hit by a higher tax outgo if they fail to clear dues, outstanding for over 45 days, to small and micro vendors who are often at the receiving end of typically long and tiring credit cycles.

Most ignored the law that was passed in 2023, hoping it would be deferred by a year or two. However, with the 2024 budget keeping it unchanged, businesses are rattled by the reality where incurred expenditures will be treated as income on which tax has to be paid for FY 24-25.

Thus, under the law, if a business entity --- be it a company, proprietorship, partnership firm, or LLP --- fails to make payment to any of its supplier registered as `micro’ or ‘small’ enterprise, it would not get the deduction of its purchase in the year of the purchase but can claim the deduction only in the year of ‘actual payment’. In the absence of deduction of such ‘expenditures’, taxable incomes, and therefore the tax of businesses will rise.

Over the past week, many business and trade bodies have held hectic consultations with auditors and tax experts to estimate the extent of their hurt and figure out ways to avert a tax blow, trade bodies and financial practitioners told ET.

Some of the small units are even considering surrendering their ‘small and micro’ registrations with the government to protect their order books amid fears that their clients, the bigger companies, could stop dealing with them.

“These are beneficial provisions for small and medium businesses. This being the first year of implementation, time and effort will be required for segregation of such amounts for calculation of disallowance,” said Siddharth Banwat, a chartered accountant.

Under the mercantile accounting system that Indian businesses follow, expenditure is booked when it is 'incurred' or accrued -- i.e. post the receipt of goods and services --- even if the 'actual payment' happens later. Now, under the laws (MSME Act and section 43B(h) of the Income Tax Act), the time limit for payment to `micro’ and ‘small’ enterprises is 15 days or a maximum of 45 days if there is a written agreement between the buyer and the seller.

Several other laws have also outlined provisions for the timely payment of dues to micro, small, and medium enterprises (MSMEs).

“Despite these provisions, MSMEs continue to face delays in receiving their dues. To address this issue, amendments were made to the I-T Act, offering protection to MSME enterprises for the timely recovery of dues. But this amendment can be a double-edged sword for registered MSME enterprises. On one hand, they may lose the ability to claim expenditures if payments are not made promptly, and on the other hand, they may struggle to receive payments if the counterparty, whether an MSME or not, fails to make timely payments. This new provision could present a challenge for corporates and auditors in identifying MSME enterprises and determining appropriate disallowances,” said Paras Savla, partner at KPB & Associates, a CA firm.

Indeed, it could be a double whammy for business units having government departments and PSUs (which often delay payments) as clients and MSME units as vendors. In the world of Indian business, large companies often demonstrate their working capital efficiency by holding back payments to voiceless MSME vendors. While the legal amendments are aimed to address their plight, things might take longer to change.

According to Roshan Agrawal, partner at the CA firm, D A V A & Associates, "Several micro and small entities may plan to surrender their Udyam registration (with the government) to preserve their business and relations with customers. They fear that if their customers, i.e. the large companies are unable to claim expenditure due to the impact of provisions of Sec43B(h), they may discourage doing business with them and move to medium-sized suppliers. Anyway, I have advised my clients to make a note that for any goods or services taken till Feb 15, 2024 from MSE suppliers, payment must be made by March 31, 2024."

Thus, a company which eventually clears the outstanding dues (pending over 45 days as on March 31) and pays the vendor well after April 1, 2024, can claim the purchase as deduction in the FY '24-25 accounts, but not in FY '23-24.

Capping the credit period to 45 days in a landscape where it has typically stretched from 90 to 180 days will mean changing the business gears to make money move faster. It is a lot more than compliance. For trade circles, it would mean altering the very DNA of many businesses --- the way money is managed, and deals are cut.

[The Economic Times]

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