Delayed payments have long been a major challenge for small and medium enterprises (SMEs) in India, affecting their cash flow, growth, and sustainability. Despite several policy measures, the problem persists, necessitating a multipronged approach to ensure timely payments and financial stability for small businesses.
The ministry of corporate affairs has stipulated companies to disclose payment information through the MSME1 form in a significant step towards transparency. This form, submitted biannually, requires companies to report payments made or overdue to Small and medium-sized enterprises, including the amounts paid within and beyond 45 days, outstanding amounts, and reasons for delays. By making these disclosures mandatory, the government seeks to deter companies from delaying payments and allow for better monitoring by regulatory authorities.
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The effectiveness of this measure will hinge on rigorous compliance monitoring and enforcement of penalties for non-compliance. Regular audits should be conducted to ensure that companies adhere to the new reporting requirements. Additionally, making these reports publicly accessible can exert additional pressure on companies to maintain timely payments, thereby fostering a culture of accountability.
Incentivising timely payments
The amendment to the Income Tax Act, effective from April 2024, disallows tax deductions for payments made beyond 45 days to SMEs. This measure seeks to address the working capital shortages faced by SMEs by incentivising larger companies to settle dues promptly. While this is a positive step, its scope currently excludes medium enterprises and certain sectors. Expanding its applicability to include all SMEs and trading concerns would ensure broader compliance and greater impact.
For this amendment to be truly effective, strict monitoring and enforcement mechanisms must be implemented. This will prevent large enterprises from manipulating payment records to circumvent the rule, ensuring that the intended benefits reach the Small and medium-sized enterprises. Such measures would not only promote timely payments but also enhance the financial discipline of larger companies.
Streamlining dispute resolution
The move by the government to amend the MSME Development Act, 2006 focuses on improving dispute resolution mechanisms. Transforming the Samadhaan portal into a comprehensive online resolution platform is a key part of this effort. The upgraded portal should include features for filing complaints, sending notices, and facilitating mediation online, making the dispute resolution process more accessible and efficient for SMEs.
Enforcing timelines for dispute resolution and capping arbitration expenses can make the process affordable and faster for Small and medium-sized enterprises. This would alleviate one of the major hurdles SMEs face when dealing with payment delays – the high cost and time involved in legal proceedings. By making the dispute resolution process more streamlined and cost-effective, the amendments can provide SMEs with a more viable recourse in case of payment delays.
Working capital challenges for SMEs
Access to working capital is crucial for Small and medium-sized enterprises, but delayed payments often hinder their financial stability. While the Pradhan Mantri Mudra Yojana (PMMY) offers collateral-free loans, banks’ reluctance to provide such loans and the insufficient amount for struggling businesses remain significant issues. Encouraging banks to extend collateral-free loans and increasing the loan amount under PMMY can provide Small and medium-sized enterprises with the necessary financial support to manage their operations effectively.
Moreover, promoting alternative financing options like peer-to-peer lending and crowdfunding can help SMEs manage working capital requirements. These innovative financing methods can offer SMEs more flexibility and quicker access to funds, thereby reducing their dependence on traditional banking channels.
Role of large enterprises, govt
Large enterprises and government agencies are significant defaulters in payments to Small and medium-sized enterprises. The facilitation council, meant to settle outstanding dues, has often been ineffective. Implementing strict penalties for delayed payments by government agencies and large enterprises can ensure accountability and prompt payment practices.
Strengthening the facilitation councils with more authority and resources can enhance their effectiveness in resolving payment disputes. By providing these councils with the necessary tools and powers, the government can ensure that Small and medium-sized enterprises have a reliable avenue for addressing their grievances and securing timely payments.
Empowering SMEs through digital and market access
The MSME ministry’s initiatives, such as the Trade Enablement & Marketing (TEAM) initiative and the Yashasvini campaign, aim to onboard Small and medium-sized enterprises onto digital commerce platforms and formalise women-owned informal micro enterprises. These initiatives are crucial for integrating SMEs into the digital economy and expanding their market access.
To maximise the benefits of these initiatives, providing digital literacy training and improving digital infrastructure in rural areas is essential. This will enable Small and medium-sized enterprises to leverage e-commerce platforms effectively, enhancing their reach and competitiveness. Additionally, offering support in logistics, packaging, and account management can help SMEs navigate the complexities of digital commerce, ensuring their success in the online marketplace.
Resolving the issue of delayed payments to Small and medium-sized enterprises requires a comprehensive approach involving legislative measures, enforcement mechanisms, and support initiatives. By enhancing transparency, incentivising prompt payments, streamlining dispute resolution, and providing financial and market access support, India can create a more conducive environment for the growth and sustainability of its SMEs. Collaborative efforts from the government, financial institutions, and large enterprises are essential to address this longstanding issue effectively. Through concerted action, the country can ensure that its SMEs thrive and continue to play a crucial role in job creation and economic development.