Tax Gambit Gone Wrong? J&K’s business community calls for review of new Income Tax Rule

19 February 2024

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Srinagar: Jammu & Kashmir’s business community has asked for a broader public debate on the implications of a recent amendment to the Income Tax Act in India, which aims to improve payment terms for micro and small enterprises (MSEs).

Several business leaders, while speaking to Ziraat Times, said that while the amendment states that any payments made by a buyer to an MSE beyond the time limit specified under the Micro, Small and Medium Enterprises Development Act (MSMED Act) will be disallowed as an expense in the year in which the payment is made, instead, the payment is now added to the buyer’s income and taxed accordingly.

“Buyers may shift their purchases to medium and large enterprises now because the amendment only applies to payments made to MSEs. This could incentivize buyers to shift their purchases to medium and large enterprises, which are not subject to the same payment terms. This could harm MSEs and stifle their growth”, said a Jammu based industrialist, requesting not to be named.

There are concerns now that MSEs may be forced to opt out of registration in this situation.

“As things stand, some MSEs may choose to opt out of registration under the MSMED Act in order to avoid the scrutiny and potential penalties associated with the new amendment. This could defeat the purpose of the amendment, which is to protect MSEs”, said Nasir Ahmed, another industrialist from Kashmir.

A few trading bodies have also joined the debate saying that this has also created an uneven playing field for traders.

“The amendment only applies to manufacturers and service providers, not traders. This could create an uneven playing field, as traders would not be subject to the same payment terms as manufacturers and service providers. This could put traders at a disadvantage and lead to higher working capital requirements”, said Navneet Bali, a Jammu-based trader.

While Ziraat Times reached out to senior State Taxes Department officials for their comments on these positions of industrial and trading communities, one senior official admitted that this might be a case of “unintended consequences for genuine cases”.

“We are now assessing if the amendment could have unintended consequences for buyers who are unable to make payments on time due to genuine reasons, such as delays from government suppliers. In these cases, the buyer could be subject to additional taxes and penalties, even though they are not at fault”, said one senior official of the Finance Ministry.

The amendment is also feared to lead to increased tax liability for buyers, especially in years when they have a large number of delayed payments. This, business bodies believe, could put a strain on their cash flow and make it more difficult for them to operate.

Now J&K’s business bodies are calling for a review of the amendment to address these concerns. They are suggesting that the amendment could be made more flexible, such as by allowing for exceptions in genuine cases of hardship. Trading bodies are also suggesting that the amendment could be expanded to cover traders, so that there is a level playing field for all businesses.