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The Micro, Small and Medium Enterprises Development Act (MSMED), 2006 was enacted to support the creation and development of MSMEs. It also enhances their ability to compete with other domestic and larger foreign counterparts. The recently implemented new GST return filing system brought with it many changes aimed at simplifying the process of filing returns.
In this article, we will analyse whether the MSMED Act and the new return filing system together affect the payment cycle and if so, whether there is a possible solution to it.
14th March 2020*
The new GST return system will be implemented from October 2020.
The present return filing system (GSTR-1, 2A & 3B) will continue until September 2020.
*Subject to CBIC notification
One of the main changes that the new system brings is the increase in the turnover limit for classification of taxpayers for filing frequency:
All MSMEs fall under the small taxpayer category. The new GST return system allows small taxpayers to choose quarterly filing of returns, whereas the large taxpayers must file returns only on a monthly basis. Further, registered buyers can take the input tax credit (ITC) in ANX-2 only on the basis of invoices uploaded by their suppliers in their corresponding ANX-1.
The MSMED Act, 2006 specifies 45 day credit period for the recipient of any goods or services to pay to the MSME supplier. It is included to protect the interest of the MSME business. The Ministry of Micro, Small & Medium Enterprises (MSME) launched MSME Samadhaan on 30 October 2017. It was launched to empower micro and small entrepreneurs across the country. It enables them to directly register their cases about delayed payments by Central Ministries/Departments/CPSEs/State Governments.
The issue arises when MSME taxpayers, who opt for quarterly filing of returns, make a supply to large taxpayers. The same is presented as follows:
On 23 August 2019, the Hon’ble Finance Minister Nirmala Sitharaman has announced many measures to boost the economy. One of them is the intention to allow GSTN to partner with the Trade Receivables Discounting System (TReDS).
TReDS is an existing platform specially created for MSMEs to sell/discount their trade receivables. This helps the MSME free up working capital faster. The TReDS platform allows for bidding of discount rates that ensure that the MSME gets the best discounting price in the market. The partnership with GSTN helps authenticate the invoice raised by the MSME since GSTN can confirm the existence of the receivable subsequent to entering the relevant details on its portal. This would incline the MSME to file its GST returns sooner to be able to sell its receivables.
The quarterly return filing option does help to ease the burden of compliance on the MSME. However, choosing to file monthly returns makes it more attractive for large taxpayers to deal with the MSME. While the payment cycle problem faced by the large taxpayers in dealing with the MSMEs isn’t fully addressed, it does appear to be a step in the right direction.