Managing Trade Credit of MSMEs: Could Amendment of Section 43B of the Income Tax Act Become a Panacea?

Micro, small and medium enterprises (MSMEs) play a significant role in the Indian economy. Apart from fuelling domestic growth, their contribution to employment generation and foreign currency earnings through exports is peerless. Term credit or accounts receivable constitutes a pivotal component of the capital structure of Indian MSMEs. The Union Budget 2023–2024 proposes to insert a new clause (h) in section 43B of the Income Tax Act, 1961, to motivate assessees to make timely payments to their micro and small enterprise (MSE) vendors to claim a deduction. Following a descriptive research design, the current qualitative study assesses whether the amendment will address the MSEs’ working capital crunch. It concludes that mere amendment is unlikely to resolve the financial shortfall; instead, the firms should rejuvenate by designing sustainable business models and exploring equity crowdfunding and digital finance. The study acknowledges a few inherent limitations, indicates practical implications and sketches a roadmap for future research. JEL Classification: H2, L26