From Delays to Discipline: Unlocking MSME Liquidity through Reforms

This article explores key reforms aimed at addressing liquidity challenges faced by India's MSME sector. It highlights three pivotal developments: the introduction of an AI-enabled Online Dispute Resolution (ODR) mechanism, Section 43B(h) of the Income Tax Act linking tax deductions to timely MSME payments, and the revised MSME classification effective from April 2025. Together, these reforms are designed to formalize the sector, enforce payment discipline, and improve access to finance.

Introduction: The Evolution and Formalization of the MSME Sector

Liquidity is the lifeline of any business, but for MSMEs, it is often the defining factor between survival and excellence. Adequate cash flow ensures timely procurement of raw materials, payment of wages, and fulfilment of orders. However, the structural disadvantage of MSMEs in negotiating credit terms often results in delayed payments, forcing them into cycles of working capital stress.

Liquidity, the Cultural Challenge

Several liquidity-focused initiatives have improved MSME receivables, yet challenges remain, particularly with PSUs and large corporates, where a cultural shift in payment behaviour toward MSMEs is still needed. In a study done in 2022, over ₹10.7 lakh crore, equivalent to nearly 6% of India's gross value added (GVA), were locked in delayed payments owed to MSMEs. A staggering 80% of invoices raised by MSMEs experience delays, with public sector undertakings and government entities among the most delayed payers.

This delay in receivables severely disrupts working capital cycles for MSMEs, compelling them to rely on costly short-term borrowing or to limit operations due to cash flow constraints. The study highlights an inherent power imbalance in buyer-supplier relationships, where small enterprises are forced to accept prolonged credit periods to retain business.

Several liquidity-focused initiatives have improved MSME receivables, yet challenges remain, particularly with PSUs and large corporates, where a cultural shift in payment behaviour toward MSMEs is still needed.

1. Online Dispute Resolution: A Digital Solution for Payment Delays

A major stride in the formalization journey of the MSME sector is the introduction of an Online Dispute Resolution (ODR) platform, launched in mid-2025. Conceived under the MSME Development Act and further strengthening the MSME-SAMADHAAN initiative, this system transitions MSMEs from paper-based complaints to a fully end-to-end digital grievance redressal mechanism.

From 15 October 2025, all new delayed payment cases must be filed exclusively on the new MSME ODR Portal (odr.msme.gov.in) — the Samadhaan portal stopped accepting new filings and redirects users to the ODR platform.

The Process

The ODR portal provides an end-to-end dispute resolution process in two stages:

• Pre-MSEFC — a voluntary, out-of-court process comprising a Digital Guided Pathway and Unmanned Negotiation.
• MSEFC — the legal procedure under the MSMED Act, 2006, comprising Conciliation/Mediation and Arbitration.

Advantages for MSMEs

• AI-facilitated Resolution: Parties can opt for automated, AI-driven negotiation before formal MSEFC proceedings.
• Empowered Facilitation Councils: Tech and financial support provided to MSEFCs, with private ODR providers empanelled.
• Speedy Resolution: Designed to deliver outcomes in weeks, not months.
• Cost Efficiencies: Digital filing and reduced procedures keep expenses low.
• Accessibility and Convenience: Reduces geographical barriers for MSMEs across regions.
• Transparency and Accountability: Digital logs, AI-generated milestones, centralized case tracking.
• Financial Backing to MSEFCs: States receive grants for legal and IT capability building.
• Mandatory Payment Compliance: Buyers face default liability if dues aren't cleared in 45 days.
• Strategic Alignment: Developed under the World Bank-supported RAMP initiative.

2. Tax-based Enforcement: Section 43B(h) of the Income Tax Act

A transformative development for payment discipline is the introduction of Section 43B(h), effective from AY 2024–25. This amendment mandates that expenditure on purchases from Micro and Small Enterprises (MSEs) will be allowed as a deduction only if payment is made within the timelines prescribed under the MSMED Act — within 15 days, or 45 days if contractually agreed.

This tax provision links compliance with the MSMED Act to tax deductibility, making it a powerful enforcement tool. Large buyers and corporates now have a financial disincentive to delay payments. For Chartered Accountants and auditors, this introduces new layers of disclosure and verification while preparing tax computations or certifying financials.

3. Revised Classification Norms: Broadening the MSME Base

The revised definition of MSMEs, effective from 1st April 2025, marks another key reform aimed at increasing the number of enterprises that can avail of government schemes, credit benefits, and legal protections under the MSMED Act.

Prior to the 2020 amendment, a small enterprise was defined by a gross investment limit of ₹5 crore. Today, the limit stands at ₹25 crore on a Written Down Value (WDV) basis, along with a turnover ceiling of ₹100 crore — effectively a 5 to 10 times expansion in threshold eligibility for MSEs.

Legal Backbone: Judicial Support to the MSMED Act

The MSMED Act, 2006 provides a statutory cap on the credit period, restricting it to a maximum of 45 days, regardless of any mutual agreement to the contrary — a provision that has consistently received judicial backing.

• Eden Exports v. Union of India (2010): Madras High Court upheld the constitutionality of limiting the credit period.
• Silipi Industries v. Kerala State Electricity Board: Clarified counterclaims and limitation periods under the MSMED Act.
• NBCC India Ltd. v. Relcon Infraprojects Pvt. Ltd. (2025): Supreme Court affirmed that even unregistered MSEs are entitled to legitimate dues.

Broader Awareness and Institutional Enablers

Increased awareness and regulatory emphasis have led auditors to scrutinize company disclosures related to MSME dues more closely, particularly Form MSME-1 filings and compliance with Section 43B(h).

The 2019 MCA notification mandated half-yearly reporting of MSE dues. Companies failing to file Form MSME-1 under Section 405 of the Companies Act face a fine of ₹20,000 plus ₹1,000 per day of default, up to ₹300,000.

The 2018 Ministry of MSME notification mandates large companies and CPSEs with turnover exceeding ₹250 crore (reduced from ₹500 crore in November 2024) to onboard with at least one of the three licensed TReDS platforms before 1st April 2025.

In FY2024 alone, over ₹1.38 lakh crore worth of invoices were financed across 41.6 lakh transactions on RXIL, Invoicemart, and M1xchange — an 80% increase from ₹75,000 crore in FY2023. Cumulatively, the platforms have processed bills exceeding ₹5.33 lakh crore.

Conclusion

For India to achieve its vision of "Viksit Bharat" by 2047, MSMEs will play a pivotal role. Their growth hinges on three key enablers: Robust Infrastructure with seamless last-mile delivery, access to Skilled Manpower, and Assured Liquidity. Daily hearings by MSEFCs, empowering them to execute awards, and automatic supplier classification without buyer discretion are steps that can further strengthen the liquidity ecosystem.

Looking ahead, it is imperative that the government, MSMEs, and Chartered Accountants work in close coordination to build on this momentum, accelerating the formalization of the MSME sector.