income tax
The Government of India has implemented several measures to safeguard Micro and Small Enterprises (MSEs) under the Micro, Small and Medium Enterprises Development (MSMED) Act. These efforts include payment timelines, interest for delayed payments, and a swift grievance redressal mechanism known as the MSME Samadhan scheme. While these protections are substantial, recent amendments, particularly in Union Budget 2023, are raising concerns about their implications for MSEs.
In the recent Union Budget 2023, an amendment to the Income Tax Act has introduced a significant change: payments to Micro and Small businesses that are not made within the stipulated time frame under the MSMED Act (set at 45 days from the effective date) will not be allowed as a tax deduction. Consequently, expenditures incurred for services or goods purchased from MSEs will only be recognized on a payment basis.
Increased Administrative Burden: Medium and large enterprises must now establish teams to monitor compliance with the new payment regulations. Given that the classification of MSEs may change annually based on turnover and capital investment, the administrative workload is expected to rise significantly.
Reliance on Unorganized MSEs: Medium and large companies often struggle to segregate micro and small enterprises due to the lack of consistent classification norms and the unorganized nature of many MSEs. They must rely on information from MSEs that necessitates independent verification.
The disallowance of legitimate expenditure poses a substantial risk for medium and large companies. To avoid the complexities of this new compliance, these firms may opt to handle tasks internally or source materials exclusively from other medium or large companies. This shift could undermine the business prospects of micro and small enterprises, which are already equipped with necessary safeguards under the MSMED Act.
While the Government has made significant strides in supporting Micro and Small Enterprises through various legislative measures, the recent amendment to the Income Tax Act introduces challenges that could adversely affect these businesses. It is vital to consider the potential consequences of such legislation and ensure that the intentions of the MSMED Act are not undermined by additional regulations. Effective collaboration between the government and businesses may enhance the protection and growth of MSEs in the long term.