JULY 202419vendors; usually 90 days. Now that's the Double Bonus for the OEM; Advance from Customers and Deferred payments to Vendors.Impact of Sec 43B (h) - Fund Flow Perspective - Who will face the Brunt?While it appears that the section will make significant impact, let us have a closer look at the impact of Sec 43B (h) on the entire supply chain.Large OEMs, despite having Cash and carry on sales, enjoy a significant Credit period with its vendors (Tier 1 Vendors).Tier 1 Vendors purchase from Tier 2 and Tier 2 in turn from Tier 3 Vendors. Tier 1 Vendors usually do not fit into the MSME category on account of the large volumes they deal with the OEMs. Tier 2 Vendors generally will be Medium entities while Tier 3 will be small and Micro entities.Now Since OEMs do not directly deal with Micro and Small entities for its Raw Material supply, Section 43 B (h) will not have significant impact on the Negative working capital cycle they are already enjoying now. For a manufacturing OEM, some overhead vendors/ Service providers may fit into Micro and Small category, but Raw Material Tier 1 vendors do not generally fit into Micro and Small enterprise category.While OEM and Tier 1 vendors do not have significant impact, on account of them not directly dealing with Micro and Small entities, Tier 2 vendors and Tier 3 vendors which are medium and small enterprises respectively will have to comply with 43 B (h) and have to make payment to its vendors in 45 days.Because Tier 2 Vendors have to make payment to its vendors in 45 days, Will OEM agree to revise the payment terms to 45 Days to Tier 1 vendors? And Tier 1 in turn revises the payment terms to 45 days to Tier 2 and Tier 3?The answer may NOT be an affirmative yes. We have a scenario where Tier 2 MSME Vendor will pay to another Small/micro Tier 3 vendor in 45 days, while it does not get its receivables collected in 45 days. It puts pressure on Tier 2 Vendors who do not have strong balance sheets to get funding from Banks.An MSME paying to another MSME in 45 days is not what is intended to be achieved with this measure. This is aimed at making, predominantly large organisations pay to Micro and Small entities in 45 days.The section will have limited impact if the OEMs do not have to bother much about the Vendors who are down in the supply chain.Effectiveness of the other Measures taken earlierThe amendment to Income Tax Act itself will not be effective in addressing the cash crunch of MSMEs, until we set right the Limitations of the other measures already implemented earlier. One of the most important measures taken was TReDS (Trade Receivable Discounting System), which aimed to bring Buyers, Sellers and Financiers on to the same platform to ease the cash crunch for MSMEs. But TReDS has certain inherent limitations which need to be addressed immediately to make it effective. Listed below are some of the limitations.Multiple PlatformsThere are 4 options available for onboarding TreDs; an entity can choose to onboard any of the 4 authorised platforms. If the Buyer and Seller onboard different Platforms, no discounting can take place. The direction should be aimed at Centralising rather than giving multiple optional platforms. The very idea of bringing all the stake holders on to a single platform is defeated when multiple options exist.We can even explore the possibility of having Industry wise allocation to each platform - like all the players in Auto Industry onboard platform A, those in FMCG onboard platform B.IT Interface & the InvestmentsTo integrate, interface and modify the existing Finance systems with TreDs Platform, significant amount of time and efforts need to be spent. Assuming a case where both Buyer and seller are on boarded on the same platform, either the seller or buyer has to initiate the Process.
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