45-Day Payment Rule For MSMEs Kicks In Today: How It Sparks Concerns & Hope Among Traders

45-day payment rule: Under the provision of Section 43B(h) of the Income Tax (I-T) Act, effective April 1, companies are mandated to settle payments to MSME vendors within 45 days

Several industry bodies have appealed to the government to postpone the implementation of the new payment rules, expressing concerns over potential adverse effects on both MSMEs and larger businesses.

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As the implementation of the 45-day payment rule kicks in, aimed at benefitting micro, small, and medium enterprises (MSMEs), mixed sentiments emerge within the business community. While many MSMEs express optimism about the upcoming regulation, concerns linger regarding potential repercussions, particularly from large corporations attempting to bypass the rule by reducing purchases.

What is 45-day payment rule?

Under the provision of Section 43B(h) of the Income Tax (I-T) Act, effective April 1, companies are mandated to settle payments to MSME vendors within 45 days. Failure to adhere to this timeline results in denial of tax deduction, with the overdue amount subjected to taxation until payments are made.

What is Section 43B(h) of I-T Act?

The Finance Act of 2023 brought about a significant change with the insertion of Section 43B(h), outlining a provision allowing for the deduction of any dues owed to Micro and Small Enterprises (MSEs) for goods or services supplied within the same fiscal year if payments are made within the specified deadline as per the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006.

This legislative amendment targets the pressing issue of working capital scarcity within the MSME sector while also fostering a culture of timely payments to micro and small businesses. Effective from April 1, 2024, this amendment covers the assessment year of 2024–2025 and onwards, signaling a proactive step towards supporting the financial health of MSEs.

Industry voices

Large companies voice discontent over the new norm, citing disruptions to their working capital and cash flows. The penalty for delayed payments, in the form of denied tax deductions, could result in funds being blocked for over a year.

Several industry bodies have appealed to the government to postpone the implementation of the new payment rules, expressing concerns over potential adverse effects on both MSMEs and larger businesses.

What are the apprehensions?

Federation of Indian Micro and Small & Medium Enterprises (FISME) acknowledges apprehensions but asserts that fears are unfounded. The organisation said the benefits of the rule, highlighting the potential for faster payments to MSMEs and improved negotiating power for smaller enterprises.

However, fears persist among MSMEs that large buyers might bypass them in favour of unregistered MSMEs or non-MSME suppliers to avoid compliance with the regulation. Representatives from the Confederation of All India Traders (CAIT) have called for a deferment of the implementation of the clause until sufficient clarification and information dissemination are achieved nationwide.

Despite the ongoing debate and concerns, industry experts view Section 43B(h) as a positive step towards fostering a more efficient and fair financial environment for MSMEs, ultimately benefiting the entire economy.