MSME 45-Day Payment Rule: Proposed Changes causes Rifts among MSMEs Stakeholders

As India’s small businesses continue to struggle with debt and late payments, the Union Finance Ministry is allegedly considering delaying the implementation of Rule 43B (h) of the Income Tax Act, which requires payments to micro, small, and medium enterprises (MSMEs) within 45 days.

According to media reports, the proposed postponement will likely last a whole financial year, with the rule scheduled to go into force on April 1, 2025.

The Finance Act of 2023 introduced an amendment to the Income Tax Act that included clause (h) in Section 43B to ensure that MSMEs receive timely payments. The new rule set a 45-day deadline for the assessee to make payments. Failure to comply with this timeline would result in pending payments being treated as income and subjected to taxation.

However, the issue stems from a variety of circumstances. Certain MSMEs, notably those in the textile industry, are concerned that the adoption of this new law may harm their connections with suppliers and purchasers, who commonly work on credit with these small businesses. Others express concern that their present systems may not be fully prepared to handle this provision.

“There could be challenges in implementation and it can be solved through consultations, convenings and improvisation over a period basis the feedback once the implementation starts,” an expert within the industry stated.

The rule requires MSMEs to set up solid internal systems to manage invoices and assure timely payments, which might be time-consuming and expensive, particularly for smaller businesses.

“Despite these obstacles, I believe there is an opportunity to reverse the odds and streamline delayed payment concerns. A phased implementation of the rule, which allows firms time to adapt, might smooth the transition and reduce disruptions. Using technology to simplify compliance and improve payment procedures may also help to alleviate the load”, according to industry experts.

Industry bodies, in their proposals to the finance ministry, have suggested potential modifications to the act or a temporary postponement to allow businesses time to adjust. Recently, the Confederation of All India Traders (CAIT), to address concerns regarding Income Tax Law 43(B)H among traders, talked to Finance Minister Nirmala Sitharaman.

Praveen Khandelwal, Secretary General of CAIT, stressed the importance of raising trader’s awareness of this beneficial offer and advocated delaying its implementation by one year. He stated that the delay would give traders enough time to understand and comply with the regulations.

Given the lack of clarity around the law’s applicability to traders and other relevant provisions, CAIT has advocated for a statewide delay of implementation until sufficient clarification and information distribution are achieved.

Several industry professionals have stated that the implementation of the 45-day payment rule is a significant step forward for MSMEs, particularly micro and small businesses, given India’s frequent issue of late payments. Legally, delayed payments arise when buyers extend payment terms to MSE suppliers beyond 45 days.

According to a report, delayed payments have reached unprecedented levels, totalling 10.7 lakh crore, or nearly 7.8 percent of GDP. Effective implementation of the rule has the potential to dramatically reduce MSMEs’ cash flow issues, allowing them to invest, expand, and contribute more to the economy. Furthermore, increased clarity and severe enforcement can promote transparency and accountability in business transactions, resulting in a more equitable economy.

According to the experts, technology can also play an important role in streamlining payment procedures and guaranteeing regulatory compliance. Automated invoice monitoring, online dispute resolution procedures, and digital payment platforms provide efficient means of compliance and settlement.

While there may be some initial adjustments as businesses adjust to tighter deadlines, believe in collaborative approach may close any gaps. Working together, we can ensure a smooth transition and maximise the potential of this powerful legislation. Timely payments will enable MSMEs to develop, innovate, and create jobs, resulting in a more robust and inclusive Indian market.