FMCG, apparel firms see red over new MSME payment rule

The proposed regulations are tighter in the absence of a written agreement, as the stipulated time of payment will be 15 days instead of 45 days. (Image/Reuters)

A new law that mandates that any payment made to registered micro, small or medium (MSME) enterprises beyond 45 days of receiving goods or services will not be recognised as an expense and added to the profit of the company for taxation purposes has caused a significant discomfort amid the  organised apparel retailers, top sources told FE.

“Essentially, the amendment, which was introduced recently to the Finance Act 2023 under Section 43B (h), stipulates that payments to registered MSME suppliers beyond 45 days will be added to the profit of the company instead of being treated as an expense. This will mean that companies will have to pay income tax on MSME payments in the event of non-compliance,” says Rahul Mehta, chief mentor, The Clothing Manufacturers Association of India (CMAI), an apex industry body, is pursuing the matter with the Finance Ministry. The proposed regulations are tighter in the absence of a written agreement, as the stipulated time of payment will be 15 days instead of 45 days.

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The body has requested the Finance Ministry to temporarily hold the implementation of the rule for the 2023-24 financial year, suggesting a staggered implementation over three years instead. It has also requested that payments from one MSME to another MSME for goods sourced should be excluded from the rule.

CMAI says that some apparel retailers have already begun cancelling their orders to registered MSMEs as they remain uncertain about meeting the March 31, 2024 deadline of the rule for the ongoing financial year. Cancellations could increase in the coming weeks and the loss as a result of cancellations could touch Rs 5000-7,000 crore depending on the order size.

While the rule affects all firms, the most aggrieved, said tax experts include fast-moving consumer goods (FMCG) and pharmaceutical firms, apart from apparel retailers, who depend on fairly long credit cycles when making payments to suppliers including registered MSMEs. Many of them also source from MSME suppliers on a regular basis and fear business models could be jeopardised due to the new payment rule.

“FMCG, apparel and pharma companies have credit cycles that extend up to 3-6 months when it comes to their suppliers and trade partners. Quite often payment to the value chain is contingent upon the revenue from sales, which is why a 45-day credit structure is too short a period for them,” Riaz Thingna, partner, Grant Thornton Bharat, said.

Tarun Arora, chief executive officer, Zydus Wellness, the maker of the Complan brand of health food drinks, said that his company made payments to registered MSMEs within the stipulated time. “We are hardwired to make payments within the stipulated time. Any amendment to existing rules does not affect us,” he said.

But chief executives of some FMCG firms, who declined to be quoted, admit that the de-recognition as an expense of payments to registered MSMEs is harsh. “While the move to protect the MSME sector is welcome, the fallout of the new rule will be that companies may not want to deal with MSME suppliers in the future,” says one CEO. “The other impact here is that MSMSE suppliers may choose to de-register themselves for fear of loss of business from their clients,” he says.