The Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006 was established to foster the growth of MSMEs and bolster their competitive standing against larger domestic and international businesses. Concurrently, the recently introduced GST return filing framework has brought significant modifications aimed at streamlining tax compliance. This article will examine how the MSMED Act and the updated GST return system jointly influence payment cycles and explore potential resolutions to any arising issues.

Background of the New GST Return Filing System

The revised GST system notably increases the turnover thresholds for taxpayer classification regarding filing frequency. Taxpayers are categorized as either "small" if their preceding year's aggregate turnover is up to Rs. 5 crores, or "large" if it exceeds Rs. 5 crores. All MSMEs fall under the small taxpayer category, allowing them the option of quarterly return filing, while large taxpayers are mandated to file monthly. Furthermore, registered buyers can only claim Input Tax Credit (ITC) in ANX-2 once their suppliers have uploaded the corresponding invoices in their ANX-1.

Background of the MSMED Act, 2006

The MSMED Act, enacted in 2006, mandates a maximum credit period of 45 days for recipients to make payments to MSME suppliers for goods or services. This provision aims to safeguard the financial interests of MSME businesses. To further support micro and small entrepreneurs nationwide, the Ministry of Micro, Small & Medium Enterprises (MSME) launched MSME Samadhaan on October 30, 2017, enabling them to directly report cases of delayed payments from government bodies and public sector enterprises.

The Payment Cycle Problem

A significant challenge emerges when MSME taxpayers, opting for quarterly return submissions, supply goods or services to large taxpayers. An MSME may declare supply details within any of the three months of the relevant quarter, by the 11th of the month following the quarter. Conversely, the large taxpayer recipient files GST returns and claims ITC on a monthly basis. Consequently, the recipient needs assurance that the MSME supplier promptly uploads invoice details to the GST portal to facilitate timely ITC availment. This discrepancy can lead to recipients delaying payments, either for the tax component or the full invoice amount, until the MSME uploads the necessary declarations. However, the MSMED Act prohibits recipients from withholding payment beyond 45 days. Such delays discourage large taxpayers from engaging with MSMEs unless they switch to monthly filing or monthly invoice uploads, potentially creating working capital issues for MSMEs due to deferred or unavailable ITC. This situation might compel MSMEs to adopt a monthly filing system, which contradicts the new return system's goal of simplifying the filing process for smaller businesses.

Proposed Solution and Conclusion

On August 23, 2019, the Finance Minister, Nirmala Sitharaman, announced several economic stimulus measures, including the proposed collaboration between GSTN and the Trade Receivables Discounting System (TReDS). TReDS is an established digital platform designed for MSMEs to sell or discount their trade receivables, thereby accelerating working capital access. This platform facilitates competitive bidding for discount rates, ensuring MSMEs receive optimal pricing. Partnering with GSTN enhances the authentication of MSME-issued invoices, as GSTN can verify the existence of receivables after relevant details are entered on its portal. This integration is expected to encourage MSMEs to file GST returns more promptly to utilize the TReDS platform for discounting their receivables. While the quarterly return option aims to reduce compliance burdens for MSMEs, adopting monthly returns makes them more attractive to large taxpayers. Although the payment cycle issues faced by large taxpayers when dealing with MSMEs are not entirely resolved, this initiative represents a positive advancement.