Fiscal Tremor: Indian Industries Prepare for Fresh Tax Legislation Affecting Transactions to MSMEs

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India Set to Rectify Business Finance Dynamics with New Law

India’s business world is bracing for a significant change as recent legislation aimed at promoting the timely settlement of Micro and Small Enterprises (MSEs) is lined up for implementation on March 31, 2024. The regulation, birthed from the Finance Act of 2023, inserts clause (h) to section 43B of the Income Tax Act, 1961, introduces significant changes for corporate entities that fail to pay their dues within a prescribed period of 45 days.

Law’s Potential Monetary Consequences and Business Strategy Adjustments

This new law stipulates that if companies do not pay small and micro suppliers on time, this expenditure will be treated as income. Consequently, the taxable income of such firms would be inflated, leading to an increased tax payout for the fiscal year 2024-2025. Recognizing the imminent tax effects of this change, many businesses are reassessing their financial strategies and reaching out to auditors and tax specialists.

Small Businesses and the Potential Repercussions

The legislation has sparked fear among small and micro businesses that the ‘big’ companies may avoid transactions with them to evade tax consequences. Consequently, these enterprises are reconsidering their ‘small and micro’ status. However, the law primarily aims to improve the financial conditions of MSMEs by guaranteeing prompt payment settlement.

Challenges and Looking Ahead

Moving to this new payment structure will not be without challenges, particularly for companies transacting with government departments and Public Sector Units (PSUs), reputed for their delayed payments. In light of the new laws, businesses are being urged to hasten the payment process to their MSME suppliers to relieve themselves of the impending tax burden, particularly for goods or services procured by February 15, 2024. Such a shift will require significant modifications to the financial planning and operational framework of Indian corporations.

The new payment time limit has already started affecting industry areas, as witnessed in the deceleration of orders and backlogged old orders in the textile industry in Surat, South Gujarat. Nevertheless, weaving units are welcoming these changes, anticipating prompter payments and improved financial circumstances for the MSMEs.

The unfolding story of this vital law transformation paints a picture of power dynamics, ambition, and monumental shifts in the global business scene, heralding new financial directions for India in ways yet unexperienced.


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