MSME Payment Rule: Will revert original Section 43B rule if MSMEs accept delayed payments beyond 45 Days; Says FM Sitharaman

Finance Minister Nirmala Sitharaman announced on Tuesday that the government will reverse the amendments made under Section 43B of the Income Tax Act if MSMEs desire to continue functioning with payment timeframes from their buyers.

Interacting with MSMEs and local industries in Ludhiana, Sitharaman stated that the government inserted the 45-day payment provision to the Income Tax Act, which has been in effect since 2008, at the request of MSMEs who have experienced payment delays from their purchasers for more than 45 days.

“If MSMEs want to relax their buyers’ payment terms beyond the 45-day maximum, whether for 45 days, 150 days, a year, or more, the changes are simple. We will change it and return to the original rule,” Sitharaman stated.

The government proposed in last year’s budget to introduce a new clause h under Section 43B of the Income Tax Act to address the issue of delayed payments faced by MSMEs in the country, which impedes the flow of working capital and overall business growth.

The clause (h), which went into effect on April 1, 2024, with 2024-25 as the assessment year (that is, the financial year 2023-24), allows buyers to claim expenses on invoices from micro and small businesses only if they are paid within 45 days (where an agreement exists) or within 15 days if there is no agreement in the year of actual payment rather than the year when the expense was incurred.

According to Sitharaman, any changes to the rule will have to be made in the full budget in July under the new government in response to MSMEs’ recommendations.

“The change in Income Tax Act was done based on the request of MSMEs that since payments were not being made under 45 days, relief in Income Tax should be given (to buyers) for the year when the payment is made to them,” Sitharaman explained.

Certain groups of MSMEs, notably those affiliated with the Clothing Manufacturers Association of India (CMAI), say the new condition is detrimental to their working capital flow because the payment cycle between them and their purchasers exceeds 45 days, sometimes up to six months. As a result, the modifications to the IT Act that require them to pay within 45 days would result in economic losses for MSMEs since buyers would prefer suppliers who did not fall under the MSME classification.

Furthermore, traders affiliated with the Federation of All India Vyapar Mandal (FAIVM), as well as associations in Chennai and West Bengal, have advocated for the repeal of the changes made to the law. Traders are currently only eligible for priority sector lending under the MSME criteria, therefore there is no requirement for their buyers to pay them within 45 days in order to qualify for tax benefits.