By CA Surekha S Ahuja
A buyer wants
60 days. A Micro or Small supplier needs money in 10. Financing can bridge that
gap.
But financing
does not automatically rewrite the buyer’s statutory payment obligation.
That is the
starting point for evaluating TReDS, factoring, invoice discounting, bank
finance and supply-chain finance.
The
real issue is not the financing product
Under Section
15 of the MSMED Act, a buyer must pay within the period agreed in writing or,
where there is no written agreement, within 15 days of acceptance. A written
agreement cannot provide more than 45 days from acceptance or deemed
acceptance.
The statutory
clock is linked to acceptance of goods or rendering of services, not simply to
the invoice date, internal approval or uploading an invoice on a financing
platform.
For covered
delayed payments, Section 16 provides compound interest with monthly rests at
three times the RBI Bank Rate. Section 23 makes such MSMED interest
non-deductible for income-tax purposes.
From 1 April
2026, the corresponding income-tax provision is Section 37(2)(g) of the
Income-tax Act, 2025. Delay can therefore create:
interest
cost + tax deduction deferral + financing cost.
Financing
should be arranged before statutory default, not used to postpone it.
Figure 1: How the statutory payment date is fixed
Who
is the supplier?
The MSMED
payment regime applies where the supplier falls within the statutory coverage.
Buyer controls should therefore verify Udyam status, category and applicability
for the relevant supply.
From 1 April
2025:
•
Micro: investment up to ₹2.5 crore and turnover up to
₹10 crore
•
Small: investment up to ₹25 crore and turnover up to
₹100 crore
•
Medium: investment up to ₹125 crore and turnover up to
₹500 crore
Section 15 protects Micro and Small
suppliers. Medium enterprises are outside it.
Financing
changes the fund flow — not necessarily the legal obligation
The first
question should not be “TReDS or factoring?”
It should be:
Who
needs liquidity, who funds it, who bears the cost, who ultimately receives
payment, and when is the buyer’s statutory obligation discharged?
TReDS
TReDS provides
an electronic mechanism for financing MSME trade receivables. The MSME can
obtain early payment from a financier, while the buyer settles the receivable
with the financier on the agreed due date.
The supplier’s
liquidity problem is therefore addressed without necessarily changing the
buyer’s underlying payment obligation.
Figure 2: Who pays whom on TReDS
Factoring
or assignment
Factoring can
transfer the receivable to a financier. But assignment does not automatically
extend the payment period.
Section 14 of
the Factoring Regulation Act preserves the MSMED payment framework for
receivables of Micro or Small enterprises. Assignment may change who receives
the money; it does not automatically change when the amount is legally payable.
Bank,
NBFC or fintech finance
The buyer may
finance its working capital and pay the supplier on time. Alternatively, the
supplier may discount the receivable.
The legal and
tax result depends on the actual structure—not merely on whether the product is
called vendor finance, invoice discounting, supply-chain finance or platform
finance.
Two
transactions that look similar but are not
Supplier
seeks early cash: A ₹10 lakh invoice is discounted by a financier and the
buyer pays the financier on the agreed due date. This is principally financing
a receivable.
Buyer
finances an overdue payment: The statutory due date passes and the buyer
subsequently arranges finance to settle the amount.
That is
fundamentally different.
Financing
the overdue amount does not automatically cure the original default.
Figure 3: Financing a receivable compared with financing a delay
The
cost of delay can exceed the financing cost
Illustratively,
on ₹1 crore for 45 days:
|
Route |
Illustrative
cost |
|
TReDS at 8.75% |
₹1.08 lakh |
|
Bank finance at 9.5% |
₹1.17 lakh |
|
Buyer borrowing at 10% |
₹1.23 lakh |
|
Fintech at 11.5% |
₹1.42 lakh |
|
NBFC at 15% |
₹1.85 lakh |
|
Statutory interest at
illustrative 16.5% |
₹2.03 lakh |
These are
illustrations, not prescribed or market rates. The financing costs are
ordinarily deductible business expenses; the statutory interest is not.
The cheapest
compliant financing may be far cheaper than financing a statutory default.
TDS:
interest, discounting and finance charges are not the same thing
“Finance
charge” is not itself a TDS category.
The correct
analysis is:
What
is the payment? Who receives it? Who bears it? What is its legal character?
Which TDS provision applies?
Interest
Where the
amount is genuinely interest, Section 194A of the Income-tax Act, 1961, or the
corresponding Section 393 framework of the Income-tax Act, 2025, may apply,
subject to the payer, payee, threshold and specific exclusions.
Interest paid
to a banking company is subject to specific exclusions under the TDS framework.
Interest paid to other specified financiers may attract TDS where Section
194A/Section 393 applies.
Receivable
discounting
A discount on
assignment or discounting of a receivable is not automatically the same as
interest merely because the financier deducts it from the amount funded.
Its treatment
depends on the substance of the transaction—whether there is an actual
assignment/purchase of the receivable, the rights and recourse of the
financier, the nature of the return and the contractual arrangement.
Therefore, do
not deduct TDS mechanically on every amount described as “discounting charges”.
At the same
time, the label “discount” cannot by itself establish that TDS is not
applicable. The documentation and actual transaction must support the
characterization.
Platform,
processing and other finance-related charges
A separate
platform, processing, documentation, administration, brokerage or other service
charge requires independent classification.
It should not
automatically be treated as interest. Equally, it does not automatically become
Section 194C payment merely because it is called a “finance fee”.
The applicable
TDS provision must follow the legal character of the payment, not its
commercial label.
The Income-tax
Act, 2025 consolidates the earlier TDS provisions into Section 393 tables, with
the underlying TDS rates and thresholds broadly retained.
Figure 4: Classifying each charge before deciding TDS
Settlement
statements must separate the components
A financing
settlement should, wherever applicable, separately identify:
Invoice
value → discount/interest → platform/processing charges → GST, if applicable →
TDS, if applicable → supplier receipt → financier funding → buyer’s final
settlement.
This prevents
the common error of treating every deduction as interest—or every
finance-related fee as subject to the same TDS provision.
GST
requires the same discipline
Financing
consideration may have a different GST treatment from platform, processing,
documentation, administration or broking charges.
Do not assume
that the entire settlement statement is exempt merely because the transaction
relates to financing.
Classify each
charge separately.
Who
should bear the financing cost?
If the supplier
chooses early payment for its own liquidity, the discounting cost may
ordinarily be a supplier-side commercial cost.
If the buyer
wants the supplier paid early, the commercial arrangement may justify the buyer
bearing the cost.
If the buyer
simply wants to extend payment beyond the statutory period, financing should
not be used to shift the economic burden of that delay onto the supplier
without careful legal and contractual review.
The question
is:
What
was agreed, who received the financing benefit, and what does the underlying
law permit?
Which
route makes sense?
|
Situation |
Starting
point |
|
Supplier does not need
early cash |
Normal timely payment |
|
Supplier needs early
liquidity |
TReDS / factoring /
receivable discounting |
|
Buyer wants supplier paid
early |
Reverse factoring /
supply-chain finance |
|
Buyer needs working capital |
Bank finance + timely
supplier payment |
|
Buyer wants credit beyond
statutory period |
Legal review before
structuring |
|
Invoice is already overdue |
Regularise default;
financing is not a cure |
Figure 5: Choosing the route for an MSME invoice
Five
questions before signing
1.
Is early cash genuinely required?
2.
What is the statutory payment date?
3.
Who is the actual financier and is there recourse?
4.
What exactly is each charge—interest, discount,
commission or service fee—and what TDS/GST treatment follows?
5.
Can the transaction be reconciled from invoice to final
settlement?
If these answers are not clear, the structure
is not ready.
Year-end
control
From February
onwards, buyers should maintain an invoice-level report showing:
supplier/Udyam
status | acceptance date | statutory due date | amount | financing route |
financier | funding date | settlement date | interest/default status
This is
particularly important at year-end because payment status can affect statutory
interest and tax deduction.
Retain Udyam
evidence, purchase terms, delivery/acceptance records, financing or assignment
agreement, recourse terms, financier identity, settlement statement, TDS/GST
workings, payment evidence and final reconciliation.
CA S.Ahuja
Perspective
TReDS,
factoring, invoice discounting and supply-chain finance sit at the intersection
of MSMED law, factoring law, contracts, treasury, income-tax, GST and
accounting.
The wrong question is: “Which financing route has the lowest rate?”
The better question is: “Which structure gives the supplier liquidity, gives the buyer commercially sensible funding, and keeps the statutory payment obligation clearly within the law?”
The real
distinction is between financing a receivable and financing a delay.
Finance
the liquidity problem. Do not finance the statutory default.
For the CFO or business owner: Pay the right party, through the right structure, at the right time, at a total cost that can be defended.
