‘45-Day Payment Rule is Hurting MSEs Instead of Helping Them’

The 45-day rule for expediting payment to micro and small enterprises (MSEs) has turned out to be a double-edged sword for the very enterprises it was meant to help, the textile industry said.

 MSEs have been compelled to slash their prices by 3-5% as big brand retailers, who are buyers from these enterprises, ask for concessions on account of shorter payment cycles. “The big brand retailers are compelling MSEs to slash prices by 3-5% since the MSES are getting paid within 45 days, not the usual 90-120 days, said Anurag Kapoor, director, Radnik Exports Global Private Ltd.

The 45-day payment rule was amended earlier this year, resulting in entities being unable to deduct due amounts to MSEs from their total income. This essentially meant that firms would be paying taxes on the due amount, resulting a higher tax burden.

If MSEs refuse to slash prices, they may lose the order as MSEs lack bargaining power “Big retail brands have negotiation power and as a 45-day payment cycle is enforced, these retailers are asking MSEs to slash prices. These small enterprises are very much dependent on big brands for getting orders and sustaining their business,” said Tony Uppal, president, Okhla Garment & Textile Cluster (OGTC). “MSEs have to reduce their prices by up to 5%,” added Uppal. Ostensibly 5% may not seem to make a big dent in MSE profits, but with shrinking profit margins over the years for textile manufacturers and exporters, it does make a difference. “MSEs’ profit margin has taken a hit by 3-5% and with input costs rising, the 3-5% hurts,” said Kapoor If not asking for a cut in prices or taking back orders, buyers are routing orders through retailers or traders as they fall outside the ambit of the 45-day payment rule. But this has again resulted in shrinking profit margins for MSE suppliers. “The MSEs, instead of transacting directly, are routing the transactions through traders since these provisions don’t apply to traders. But this is eating into the profit mar-gins of MSE suppliers, said Rajesh Chamber Sharma, vice president, Chamber of Industries of Udhyog Vihar, Gurgaon.

“Our profit margin will come down by 1-2% as retailers and traders take their cut in these transactions,” said a textile exporter: Industries have different payment cycles, and the textile industry traditionally has a longer payment cycle. The textile industry has informal arrangements to tide over the cash flow crunch. Parties transacting have a good understanding of each other’s financial standing and have no hesitation in allowing longer payment time lines.

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