MSME New 45-Day Payment Rule: Tax Professionals and Traders disagree with Finance Ministry’s MSME payout rule

Traders and Tax Professionals urge the finance ministry to re-examine the Income Tax Act’s sub-section ‘H’ of Section 43B, citing concerns that the taxman may deny some deductions from business revenue.

Section 43B of the Income Tax Act specifies which expenses can be deducted from business income in the year of actual payment.

The Finance Act 2023 added a new sub-section ‘H’ to section 43B, which allows the assessee to deduct any sum paid to micro or small enterprises (MSMEs) within the normal time limit of 15 days from the date of acceptance of supply, or 45 days in the case of any agreement between buyers and MSMEs.

According to the explanatory memorandum to the Finance Bill, 2023, this took effect on April 1, 2024, and will apply in assessment years 2024-25 and the following years.

The goal of implementing the subsection is to encourage quick payments to micro and small businesses. However, the rule appears to have caused some resistance to purchase from MSMEs due to concerns about the disallowance of deductions from business income.

If the deduction is denied due to a failure to pay within 45 days, the tax burden could rise to about 40%, including interest and penalties, according to traders.

“Several businesses have longer credit periods than 45 days, and this is causing division between businesses that can and cannot give credit of more than 45 days,” Narendra Kapadia, director of the Confederation of West Bengal Trade Associations said.

According to a statement from the confederation, traders are under pressure to find operating capital for the same volume of business.

“The fundamental aim of section 43B(h), to promote MSMEs, is compromised when this makes buying from them unprofitable for their customers. The cancellation of orders as well as MSME registrations has already begun,” according to the statement.

The Confederation has requested that sub-section “H” be removed.

“We find it hard to wait further in the midst of the ongoing Lok Sabha Election days,” said in a statement.

“The traders are facing hard times and are afraid to make purchases from micro and small enterprises for fear of disallowance of purchase amount remaining outstanding at year-end, which is March 31st,” said the All India Federation of Tax Practitioners national president, Narayan Jain.

He stated that the rule should be reviewed and amended to allow payments made within the due period for submitting income tax returns.