Indian exporters are facing a perfect storm. A recent regulation aimed at aiding domestic businesses is instead creating a cash crunch that threatens their ability to compete on the global stage. The culprit? Section 43B(h) of the Income Tax Act 2023, which mandates a strict 45-day payment window for goods and services procured from Micro, Small and Medium Enterprises (MSMEs).
A Collision Course: Short Payment Cycles vs. Long Credit Realities
The Federation of Indian Export Organisations (FIEO) along with leading export promotion council chiefs have jointly petitioned Prime Minister Narendra Modi for an exemption from this rule. Their primary concern is the fundamental mismatch between the mandated payment cycle and the export business model. Unlike domestic businesses that typically enjoy shorter payment terms, exporters often deal in extended credit cycles. Overseas buyers frequently settle dues after 90 or even 120 days, creating a significant lag between their outflows and inflows. Being forced to pay domestic suppliers within a rigid 45-day window creates a significant cash flow strain. This disrupts their ability to fulfill existing export orders or secure new ones, potentially crippling their export operations.
Seeking a Win-Win: Supporting MSMEs Without Sinking Exporters
It’s important to understand that exporters aren’t against supporting MSMEs. They recognize the critical role these smaller enterprises play in India’s economic ecosystem. However, they advocate for a solution that takes into account the unique challenges faced by the export sector.
Charting a Course for Balance
Industry representatives have proposed several alternative solutions that could achieve a win-win scenario:
- Extended Payment Window for Exporters: Granting exporters a longer window, perhaps 90 days, would better align with their typical credit cycles, alleviating the immediate cash flow squeeze.
- Discounted Bill Financing Schemes: The government could facilitate access to discounted bill financing schemes. These schemes bridge the gap between exporter payments and supplier dues by offering exporters working capital at lower interest rates.
- Tiered Payment System: Implementing a tiered system based on export transaction size could offer more flexibility. For smaller value exports, a 45-day window might be manageable. However, for larger deals with extended credit cycles, a longer window or access to financing schemes would be crucial.
The government now walks a tightrope. It must find a solution that balances the need to support a robust MSME sector with the crucial role of exporters in driving India’s economic engine. Striking this balance will be essential for fostering a healthy and competitive export environment, ensuring the continued growth of both MSMEs and the export sector.
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