Opinion
Receivables are the biggest burden on small businesses
Summary
We need a movement of ethical pressure to get India’s big businesses to pay vendors their duesThe Union Budget for 2023-24 has proposed an amendment to Section 43B of the Income Tax Act. The purpose of this amendment is to help small businesses that are at the mercy of their big customers. Those big guys seem to leave no stone unturned in denying timely payments to their small vendors. Admittedly, this tax amendment is an indirect way to help reduce the small guy’s problem of delayed receivables. By one estimate, the aggregate outstanding payments due to micro, small and medium enterprises (MSME) is close to a whopping ₹10 trillion. Those guilty of this inexcusable delay include both public and private sector companies. The sheer interest burden annually on these small businesses would be close to ₹1 trillion, which is a deadweight burden around their neck. The proposed amendment to Section 43B says that payment to an MSME as a tax deduction will be allowed only if actually paid, and not shown as accrued payable. Or else the entire amount will be treated as income and taxed accordingly. It remains to be seen whether this deters big businesses from delaying payments to their small vendors. Since tax declaration is only at the end of the financial year, big corporates may still get away with delayed payments. Still, it is a step in the right direction. The new insolvency code introduced in 2016 also had a provision that non-payment of an amount as low as ₹100,000 could trigger an insolvency process. During covid, this threshold was increased to ₹10 million, meaning it was substantially out of bounds for most MSMEs to threaten insolvency proceedings for payment defaults. In any case, the “event of default" under the code requires many tick marks even before the law can move.
Five years ago, the Reserve Bank of India’s expert committee on MSMEs led by a former chairman of the Securities and Exchange Board of India submitted a comprehensive report which had also identified delayed payments as a big problem. The Parliamentary Standing Committee on Finance in April 2022 submitted a report on strengthening credit flows to the MSME sector. The committee estimated the funding gap to be ₹20-25 trillion. This presumably includes funding receivables. Almost all credit needed by small business is for working capital. But not even 40% of MSME businesses get formal credit from the banking system. The rest have to depend on own resources, friends and family, or be at the mercy of their customer/s.
There are more than 65 million enterprises in India, perhaps 99% of them small or tiny. They typically employ less than 5 people and have a turnover under ₹20 lakh. Only 10 million have bothered to register on the Udyam portal set up by the central government. A large number of them operate in the shadows of informality. This is of course changing for the better, as they step into the goods and services tax (GST) net. Despite many committees and attempts at finding a solution, the problem of funding MSMEs or reducing their burden of high receivables just won’t go away, and is resistant to legal solutions or reform. Let’s look at some of the problems.
The MSME law enacted in 2006 made it illegal to delay payments beyond 45 days. Aha, but the crucial question is when does a payment become due? It is due only once the invoice is final. What if the customer keeps the invoice as pro-forma, or not pucca? Then technically the 45-day clock has not even begun to tick. This is an old trick. In recognition of this problem, RBI introduced the Trade Receivables Discounting System (TReDS), which is an online bill discounting system. Investors can ‘buy out’ a receivable payment for a discount and then pursue a big company for collection. The problem is that even after five years, it has not made a dent. That’s because large corporations, including public sector undertakings, won’t join the platform.
This bill discounting system would work only if enough large companies and ‘investors’ join the platform. But the government has found it difficult to cajole its own companies to join. Third, how about naming and shaming? Tamil Nadu tried to encourage small businesses to post their defaulter’s name on a state government portal so that it would pressure the organization to pay up. It didn’t succeed because who would want to displease and embarrass one’s only customer? The reality is that most small businesses depend entirely on just one or two customers for their entire business. So they won’t publicly post the defaulter’s name. A fourth approach is to use the GST network, where a transaction gets recorded even if payment has been delayed. Using the account aggregator framework, and cash flow-based funding, the small vendor can then access funds based on receivables as authenticated by the GST network data. But this requires the GSTN to have open- access architecture, at least to potential lenders and those who can fund receivables. That is happening in a small way. Then there is peer-to-peer lending, where direct funding of MSMEs is possible. But that too is at a nascent stage right now.
MSMEs make up nearly half of all industrial output, employment and exports. But their credit woes just won’t go away. They face other challenges and risks too, but none is as serious as recovering dues from big customers. Nothing short of a national movement of ethical pressure will work. Maybe the big industry chambers should take a pledge from all their members that they will never squeeze their small vendors.
Ajit Ranade is a Pune-based economist
