Section 43B(h) of the Income Tax Act, introduced in April 2024, likely aims to streamline tax compliance and ensure timely payment of dues.
The Federation of Pharmaceutical and Allied Products Merchant Exporters (FPME) has raised concerns about regulatory and administrative challenges impeding the growth of pharmaceutical exports from India. According to the association, these issues include complex compliance requirements, delays in customs clearances, and difficulties with taxation procedures. FPME has formally flagged these challenges to key government bodies, including the Finance Ministry and the Central Board of Indirect Taxes and Customs (CBIC), urging them to address the hurdles faced by exporters.
The issues reportedly affect the efficiency and competitiveness of Indian pharma exporters in the global market, with stakeholders highlighting the need for streamlined processes, better coordination among regulatory agencies, and more supportive policies to facilitate smooth export operations. The resolution of these challenges is considered crucial to sustaining India’s position as a leading exporter of pharmaceutical products.
Section 43B(h) of the Income Tax Act, which became effective in April 2024, introduces a requirement that impacts the cash flow of exporters and other businesses. According to this section, payments to suppliers registered as Micro, Small, and Medium Enterprises (MSMEs) must be made within 45 days from the date of acceptance or the date of deemed acceptance of goods or services to claim tax deductions on such expenses.
This provision aligns with the government’s broader goal of supporting MSMEs by ensuring timely payments, as delays in payments have been a significant challenge for these enterprises.
However, exporters have expressed concerns that this mandate can disrupt their cash cycles due to:
1. Longer Receivable Periods: Exporters often operate with extended receivable cycles, as payments from foreign buyers are not always prompt.
2. Cash Flow Strain: If exporters are required to settle dues with MSME suppliers within 45 days but face delays in receiving payments from customers, it could lead to liquidity challenges.
3. Working Capital Adjustments: Exporters may need to arrange for additional working capital or adjust credit terms, which could increase financing costs.
The intent behind Section 43B(h) is to address the payment delays faced by MSMEs, a sector crucial to the Indian economy. However, its implementation poses challenges for industries with longer payment cycles, particularly exporters. Stakeholders ycmay seek relief measures, such as extending the payment window or aligning it with the payment cycles of buyers.
It’s clear that exporters face unique challenges in managing their cash flow due to the extended payment cycles and the mismatch between receiving payments from customers and making payments to suppliers. The ongoing dialogue with the finance ministry reflects the urgency for regulatory support to address these issues.
The proposed exemption for exporters from the 180-day payment rule could significantly benefit the industry by providing more flexibility in managing working capital and ensuring smoother operations. Continued advocacy and collaboration between exporters and policymakers will be essential in driving favorable outcomes that support the growth and sustainability of the export sector.
The issue of transparency at customs points has become a significant concern for merchant exporters. Customs agents often demand additional documentation such as Certificate of Analysis (CoA) and Good Manufacturing Practices (GMP) certificates, in addition to purchase bills. This poses challenges for exporters who purchase finished goods through local distributors of manufacturers, as these distributors may not have access to such specific documents.
According to a spokesperson from FPME (Federation of Pakistan Chambers of Commerce & Industry), there are no established norms or regulations that mandate exporters to provide CoA and GMP certificates for customs clearance. This lack of clarity and consistency at customs points further complicates the process for merchant exporters, contributing to delays and increased costs.
The comments from the CBIC spokesperson highlight the importance of transparency and the need for clear communication in handling complex customs cases. Meanwhile, experts point out that regulatory challenges are providing opportunities for countries like Sri Lanka, Bangladesh, Dubai, and Turkey to compete more effectively with Indian pharma exporters. Particularly, Bangladesh is rapidly emerging as a significant player in the global pharmaceutical industry, posing a challenge to India’s long-standing position as the “pharmacy of the world.”
In April-October 2024, India’s pharmaceutical exports stood at $17 billion, reflecting an 8% growth compared to the same period in the previous year. This growth highlights the resilience and increasing global demand for Indian-made pharmaceutical products.
