India's textile industry, a major contributor to the economy, is facing a ripple effect due to a new amendment in the Companies Act 2023. This amendment, aimed at improving liquidity for Micro, Small, and Medium Enterprises (MSMEs), mandates faster payments to these entities. While the long-term benefits are debatable, the immediate impact has been disruption and uncertainty in the trade, particularly for yarn and other textile products.
The new amendment and its affects
The Amendment in Section 43B(h) of the Income Tax Act now requires tax payers (businesses registered under Companies Act 2023) to pay micro and small enterprises (MSMEs) within 45 days (with a written agreement) or 15 days (without a written agreement). As an expert points out the law is a positive step towards empowering MSMEs, but the government needs to provide support and guidance to ensure smooth implementation.
However, this change has caused confusion and short-term disruption in textile trade. Some buyers are avoiding purchases in the current fiscal year to avoid tax implications. Indeed, proponents argue the law will improve cash flow for MSMEs, boosting their financial health and growth potential. However, critics highlight the practical difficulties of adhering to the strict timelines, especially in industries with established longer credit periods. Additionally, the onus of verifying supplier registration under the MSME Act adds to its complexity.
It may be noted that the Indian textile industry contributes over 7 per cent to the GDP and employs over 45 million people. MSMEs account for over 90 per cent of textile units in India, highlighting their significance. Traditionally, the textile industry operates on credit periods ranging from 60 to 120 days. With the change in rule initial reports suggest a decline in new purchases and order cancellations.
New rule overview
|Section 43B(h) of the Income Tax Act
|All purchases from registered MSEs
|45 days (written agreement), 15 days (no agreement)
|Consequence of Late Payment
|Unpaid amount becomes taxable income for buyer in next year
|April 1, 2023
Weighing in the pros and cons
Indeed, there are pros and cons of this change. While supporters say, the change means improved cash flow and financial stability for MSMEs; reduced dependence on credit and potential for expansion; increased bargaining power and fairer market practices. For example, a textile manufacturer in Surat, struggling with delayed payments from large buyers, welcomes the new law as a potential game-changer for their business.
However, critics argue, potential loss of business due to stricter payment terms; increased administrative burden for documentation and verification. As a garment exporter in Delhi expresses his concern about the practical challenges of implementing the new payment terms, particularly with overseas suppliers.
Similarly for buyers, the pros are compliance with the law and avoidance of tax implications; potential for long-term cost savings due to reduced interest payments. The cons on the other hand are: short-term disruption in established business practices; difficulty in adjusting to shorter credit periods; increased risk of stockouts and production delays
The new payment law for MSMEs in India has sparked a debate within the textile industry. While its long-term benefits for financial inclusion and MSME growth are undeniable, the immediate challenges of disruption and adaptation cannot be ignored. A balanced approach, considering industry feedback and providing necessary support, is crucial for ensuring a smooth transition and maximizing the positive impact of this legislation.