Exporters Request Exemption: 45-Day MSE Payment Rule

Indian exporters are facing a cash flow squeeze due to a recent regulation aimed at supporting a different sector. The Finance Act 2023 introduced Section 43B(h) of the Income Tax Act, mandating a 45-day payment window for goods procured from Micro, Small and Medium Enterprises (MSMEs). While the policy aims to bolster the financial health of MSMEs, exporters argue it creates a significant working capital crunch for their businesses.

Exporters Cite Disparate Payment Cycles

The Federation of Indian Export Organisations (FIEO) along with major export promotion council heads have jointly petitioned Prime Minister Narendra Modi for an exemption from this provision for export companies. Their primary concern lies in the inherent difference between domestic and international trade cycles. Unlike domestic suppliers, exporters typically deal with extended credit cycles. They often wait several months to receive payment from overseas buyers. The 45-day payment deadline for MSME supplies disrupts their cash flow, making it challenging to manage working capital effectively.

Potential Domino Effect on MSMEs and the Broader Economy

The potential impact extends beyond exporters and could inadvertently harm the very sector the policy aims to help. While the policy aims to expedite payments for MSMEs, delaying settlements due to a cash flow squeeze on exporters could strain their financial health as well. This could lead to delayed or reduced orders for MSMEs, impacting their growth prospects. The industry body is advocating for an alternative solution that ensures timely payments for MSMEs without jeopardizing the export sector’s competitiveness.

Possible Solutions and Ongoing Discussions

Exporters have proposed various solutions, including:

• Extended Payment Cycle for Exports: Granting exporters a longer window, say 90 days, to settle payments for MSME supplies specifically procured for export purposes. This would better align with their typical credit cycles.
• Tax Benefit for Delayed Payments: Allowing exporters to deduct the cost of delayed payments due to extended credit cycles from their taxable income. This would ease the immediate cash flow burden and offer some financial relief.

The government is likely to consider these proposals and may introduce modifications to the current regulation. Striking a balance is crucial.

Balancing Interests in a Growing Economy

This policy debate underscores the complexities of fostering an environment that supports the growth of various stakeholders within the Indian economy. The government’s challenge lies in finding a solution that strengthens MSMEs while ensuring the continued competitiveness of Indian exporters in the global marketplace. Ideally, the solution should address the cash flow concerns of exporters without creating a domino effect that could negatively impact MSMEs and the broader economy.

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