No Relief in MSME Rule you must have to make Payment within 45 days

The government will impose a rule in FY25 mandating payments to micro, small, and medium enterprises (MSMEs) to be made within 45 days, failing which corporations will be required to pay tax on the amount due.

According to two senior finance ministry officials, any changes to the rule will be possible only in the Union Budget in July. They claimed that the government is not considering postponing the rule by a year, as traders have requested.

“According to the Finance Act 2023, companies need to make payments to the MSME sector within 45 days, which is scheduled to come into effect from April 1, 2024, else the companies cannot claim deductions on it,” a senior official from the finance ministry said.

The Finance Act of 2023 added Section 43B (h) to the Income Tax Act to ensure that MSMEs receive timely payments and have uninterrupted cash flow. If a company fails to make payments within 45 days, the amount will be added to its profit and taxed accordingly.

Parliament has already accepted the amendment. The new rule suggests that an employer, including a firm, can only claim a deduction for a tax, duty, cess, or charge owed to the government when it is actually paid, regardless of when it is earned or incurred.

“The provision makes sure that businesses fulfil their tax obligations promptly, rather than deferring payments indefinitely for tax benefits,” the second finance ministry official explained.

No Change Possible

Any changes to the rule may only be made in the next budget in July, according to the official, who added that no changes are allowed before then because they must be authorized by parliament.

“Even an ordinance route is not feasible as parliament will not be in session to approve it till July,” the official went on to say.

The Confederation of All India Traders (CAIT) requested that the rule be postponed for a year due to a lack of clarity. CAIT Secretary General Praveen Khandelwal stated that traders across the country need to be more aware of this provision.

MSMEs confront rising issues as a result of delayed payments from both public and private institutions. Small enterprises frequently operate on tight margins, and payment delays damage their cash flow and limit their operating capabilities.

Delays in payments have a wide-ranging impact on the MSME ecosystem, from manufacturers to suppliers. The income tax amendment seeks to remedy the issue.

According to the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006, the buyer must pay the MSME supplier within 45 days of accepting the products or services delivered.

Finance Minister Nirmala Sitharaman has mentioned the issue multiple times since the pandemic, urging businesses to make prompt payments.

“It’s a positive thing; more teeth provided by the new rule are beneficial. This should be implemented strictly. There may have been some hurt, but awareness was present. There could be a loss of business. The new rule should be maintained and enforced,” said Ashok Saigal, co-chairman of the Confederation of Indian Industry MSME Council.

He said the issue is primarily about buyers’ access to finance or a credit gap in the banking industry.

“It will be a trade-off between taxation and extra borrowing costs. If the buyer has been in business and has a good reputation, obtaining financing should be straightforward. Businesses should find a mechanism to secure financing within 45 days in order to make payments to MSMEs.” Saigal explained.

In addition, the government has put in place procedures to guarantee that these payment terms are followed, such as the Trade Receivables Discounting System (TReDS), which assists MSMEs in receiving payments on time by facilitating invoice discounts.

The TReDS platform allows MSME sellers to discount their invoices/bills of exchange against major corporations, including government departments and public sector organizations, using an auction method to achieve timely receivables at competitive market prices.