Proposed Amendments to MSME Development Act to Facilitate Prompt Payments to Small Businesses

The government is considering revisions to the MSME Development Act, 2006, to ensure timely payments to micro, small, and medium enterprises (MSMEs).

Currently, if a payment is delayed by more than 45 days after the receipt of goods or services from an MSME supplier, the buyer is required to pay compound interest at thrice the notified bank rate. Each state has a facilitation council to settle disputes and issue directives for payment, but these measures often fall short, leading to lengthy disputes and defaults. An estimated Rs 10.7 lakh crore is believed to be tied up in such dues.

In response, the Ministry of MSME is contemplating reforms to simplify procedures and expedite payments. They are also exploring ways to ensure the enforcement of awards issued by the facilitation council.

Additionally, the Ministry is considering incorporating mediation as an alternative dispute resolution method, following the passage of the Mediation Act, 2023. While most contracts between MSMEs and buyers include arbitration clauses, this process can be time-consuming.

These proposals are currently under discussion, and the Ministry plans to engage with stakeholders before finalizing them. The overarching goal is to lay the groundwork for these reforms to be implemented by the next government.

Addressing payment delays is crucial for MSMEs to enhance productivity and efficiency. In line with this, amendments to the Income Tax Act, 1961, have been introduced, stipulating that if a company fails to pay an MSME within 45 days, the overdue amount will be added to its profits, subjecting it to corporate tax. This provision will come into effect from April 1 of this year.