A small trade union is suing the Indian government for loss of turnover due to payment delays

NEW DELHI: In what could turn into a showdown between traders and the government, the… Traders’ Union – Federation of All India Vyapar Mandal– filed a petition in the Supreme Court earlier this week against Section 43B(h) of the Income Tax Act, alleging violation of fundamental rights. The newly introduced provision penalizes small businesses if buyers take more than 45 days to pay bills.

According to Mr. Jayendra Tanna, National President, Federation of All India Vyapar Mandal, the traders are asking for an interim suspension and destruction of the provision.

The traders argue that the newly added Section 43(B)(h) unfairly penalizes small businesses by restricting them from offering credits of more than 45 days to buyers. This restriction, they argue, pushes buyers toward mid-size units, creating an arbitrary classification that violates constitutional rights.

The traders claimed that the new clause imposes taxes on the entire transaction value rather than just the profit earned. This, the traders claim, puts pressure on the working capital of micro and small businesses, discourages medium-sized enterprises from purchasing from smaller companies, and is contrary to Indian law. WTO obligations. Moreover, the traders claim that the clause ignores RBI norms on credit terms and applies only to private companies. This is an infringement on the rights of small and micro businesses to do business on their own terms.

The challenge has been raised under Articles 14 and 19(1)(g) of the Constitution of India. Section 43B(h) of the Finance Act 2023 provides that amounts due to micro and small enterprises for goods supplied or services rendered in the same year may be deducted if paid within 45 days, as per the MSME Law, 2006.

For example, hypothetically, a small unit (“A”) supplies goods worth ₹1 crore to a medium unit (“B”). If “B” fails to pay within 45 days, “A” will be liable to pay tax on the entire ₹1 crore, instead of just the profit earned. This situation could jeopardize the viability of “A”, leading to a preference for customers with fast payments and a reluctance among buyers to engage with micro and small units.

Experts acknowledge the intention to protect MSME units, but express concerns about possible business losses and loss of a level playing field.

Amit Maheshwari, tax partner at AKM Global, a tax and advisory firm, said, “While the newly introduced section 43B(h) aims to protect MSME units from a long credit period, most MSME units are however apprehensive in anticipation of loss of Businesses as buyers may prefer to purchase from medium and large manufacturers, allowing buyers to enjoy a long credit period. In particular, SMEs in the chemical, textile and agricultural sectors are likely to suffer more as their working capital cycle is relatively long. This rule may level the playing field among industries whose buyers prefer to purchase goods with longer credit terms. To create a balance, the government may consider changing the rule to allow the deduction if the payment to the MSME unit is made after 45 days but before filing a tax return.”

What remains to be seen is whether the court will give the sector the necessary breathing space or not, or whether it will be in favor of the government’s position. With the ongoing Lok Sabha elections, any decision to repeal the provision can only come through the courts as the government cannot amend any provision of the Finance Act.