The Government is taking all the steps to strengthen the Medium, Small, and Micro Enterprises (MSME) by providing easy registration, earlier settlement of their invoice, loans at a lower rate, concessional rates of taxes, etc. To stabilize the financial aspect of the MSME, All business entities are required to settle the invoices of MSME within 45 days from the date of invoices. In case of non-payment within the stipulated time, the consequences are the disallowance of an expense under the Income Tax Act.
An alternate system of invoice discounting is also provided to ensure financial support to MSMEs. The Reserve Bank of India provides the “Trade Discounting System Platform” to settle dues to MSMEs as soon as possible.
1. What is a Trade Discounting System Platform (TReDS)
- TReDS is an online electronic platform and an institutional mechanism that provides for factoring of trade receivables of MSME sellers.
- TReDS enables the MSMEs to sell their trade receivables or invoices to the financers at a discounted rate through auction to ensure the earlier realization of their debtors.
- The financer shall make the payment to the MSME after deducting discounting charges.
- The buyers shall make the payment to the MSME as per their credit period.
- This facilitates financial stabilization to the MSME and corporate buyers shall get the time to manage their working capital along with timely payment to MSME.
- E.g.
- MSME Raised Invoice to the Company of INR 1,00,000/- with a credit period of 40 days.
- MSME sold this invoice on the TReDS platform for INR 95,000/- in 5 days.
- Now the company shall make the payment against such invoice to the Financier of INR 1,00,000.
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2. Who is required to register on the TReDS?
The following persons are required to register on the TReDS
- The Seller (MSME)
- The Buyers
- The Financers
3. Turnover criteria for the buyers to onboard the TReDS portal
- As per Gazette notification S.O. 5621(E) dated 02.11.2018, all Companies with a turnover of more than Rs 500 crore and all CPSEs were required to get themselves onboard on the Trade Receivables Discounting System Platform (TReDS) to address cash flow problems of MSMEs.
- However, to enhance the factoring scope for the MSME, the MSME has issued the revised notification vide Gazette Notification No. S.O. 4845(E) dated 7 November 2024.
- As per the revised notification, all the companies with turnover of more than INR 250 Crores and all the Central Public Sector Enterprises are required to onboard the TReDS platform.
- All companies are required to complete their onboarding process by 31st March 2025.
Conclusion:
The Government has taken this step to make the MSME available with finance on a timely basis and the same shall allow the corporate buyers to manage their working capital along with timely payment to MSME. As per the MSME Act, payments to MSMEs are required to be made within 45 days. As per Income Tax Act, if payment to an MSME is outstanding for more than 45 days on 31st March 2024 then the same shall be disallowed for Income Tax. TReDS will ensure compliance with MSME Law and Income Tax Law by managing working capital.
