A small traders union sues Indian govt for loss of business due to payment deadlines

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

According to Mr. Jayendra Tanna, National President of the Federation of All India Vyapar Mandal, the traders seek an interim stay and the quashing of the provision.

The traders argue that the newly added Section 43(B)(h), unfairly penalises small enterprises by restricting them from offering credit of more than 45 days to buyers. This restriction, they claim, pushes buyers towards medium-scale units, creating an arbitrary classification that violates constitutional rights.

The traders alleged that the new clause imposes taxes on the full transaction value instead of just the profit earned. This, the traders claim, squeezes working capital for micro and small enterprises, discourages medium enterprises from buying from smaller ones, and violates India’s WTO commitments. Moreover, the traders argue that the clause disregards RBI norms on credit periods and applies only to private companies. This infringes on the rights of small and micro companies to conduct business on their own terms.

The challenge has been raised under Articles 14 and 19(1)(g) of the Indian constitution. Section 43B(h) of the Finance Act 2023 stipulates that sums owed to micro and small enterprises for goods supplied or services provided can be deducted in the same year if paid within 45 days, as per the MSME Act, 2006.

Hypothetically, for instance, a small unit (“A”) supplies goods worth ₹1 crore to a medium unit (“B”). If “B” fails to pay within 45 days, “A” is liable to pay taxes on the entire ₹1 crore, rather than just the profit earned. This situation could put “A’s” business viability at risk, leading to a preference for early payment clients and reluctance from buyers to engage with micro and small units.

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

Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm states, “While the newly introduced section 43B(h) seeks to protect MSME units from long credit period, however, most of the MSME units are apprehensive in anticipation of loss of business as buyers may prefer to buy from medium and large scale manufacturers which would allow buyers to enjoy long credit period. Especially, MSME units in the chemical, textiles and agri sectors are likely to suffer more as their working capital cycle is relatively large. This rule may take away the level playing field from the industries whose buyers prefer to buy goods on a larger credit period. To create a balance, the government may consider to amend the rule to allow the deduction if payment to MSME unit is made after 45 days but before filing a tax return.”

What remains to be seen is whether the court gives due breather to the sector or not, or whether it favours the stance of the government. With the ongoing Lok Sabha elections, any decision to recall the provision can come only through the court, as the government cannot amend any provision of the Finance Act.