MSME Payment Reform: Government Considers Amendments

Government Mulls Amendments to MSME Development Act for Prompt Payment

The central government is considering further empowering provisions to ensure prompt settlement of delayed payments to micro, small, and medium enterprises (MSMEs) through potential amendments in the MSME Development Act, 2006.

Current Norms and Challenges:

Currently, if a payment is delayed by more than 45 days after the receipt of a product from the supplier or MSME, the buyer is obligated to pay compound interest at thrice the notified bank rate with monthly rests to the supplier. Each state has a facilitation council for dispute settlement and payment filing, which can issue directions to the buyer in case of payment delays.

Addressing the Concerns:

However, these existing provisions often fail to provide adequate recourse to MSMEs, leading to prolonged disputes that can last for years as buyers may choose to challenge the award in higher courts or default on payment. An estimated Rs 10.7 lakh crore is believed to be stuck in such dues.

Proposed Reforms:

To address these concerns, the Ministry of MSME is reportedly considering an overhaul of the provisions to streamline procedures and expedite payment execution. Additionally, it aims to introduce enabling provisions to ensure the implementation of awards by the facilitation council, ensuring MSMEs receive their payments promptly.

Exploring Alternatives:

Moreover, with the enactment of the Mediation Act, 2023, the ministry is exploring the inclusion of mediation as an alternative means for settling dues outside of court. While most contracts between MSMEs and buyers include arbitration clauses, this process can also be time-consuming.

Consultation and Implementation:

According to sources, discussions on these issues are currently underway, and the ministry plans to engage in consultations with stakeholders before finalizing the provisions. The overarching objective is to lay the groundwork for these reforms so they can be implemented by the new government after the elections.

Enhancing Efficiency:

Litigation can often be costly and time-consuming, and improving the payment cycle can enhance the productivity and efficiency of MSMEs.

Government’s Previous Measures:

In a bid to ensure timely payments to small businesses, the government previously amended the Income Tax Act, 1961, introducing a new clause. Under this provision, if a company fails to pay an MSME within a 45-day period, the outstanding amount would be added to its profit, and the company would be liable to pay corporate tax on it. This provision is set to be implemented from April 1 this year.