Rule on payment to MSMEs within 45 days in effect from Apr 1

The Income Tax regulation barring enterprises from tax dedication claims beyond 45 days to MSMEs for the supply of goods and services will be in effect from April 1. 

Introduced through the Finance Act according to Section 43B(h) of the Income Tax Act, a larger company not paying an MSME withing 45 days in case of a written agreement cannot deduct expenses from taxable income, which results in higher taxes.

Some industry bodies have requested for the government to postpone implementing the new payment rules.

The Federation of Indian Micro and Small & Medium Enterprises (FISME) opines that the new rule can potentially change the game for MSMEs. 

The fear MSMEs have is that this provision would result in large buyers cold-shouldering MSME suppliers and begin purchases either from non-MSMEs, or those not registered with Udyam.

Admitting that Section 43B(h) has caused few apprehensions among both MSMEs and larger businesses, FISME said, "such fears are unfounded"

On the other hand, FISME added that despite the apprehensions, Section 43B(h) has the prospect to be a game-changer for MSMEs. 

This will result in faster payments for MSMEs, which is critical for their financial health and growth. 

"The provision strengthens MSMEs' position when negotiating payment terms with larger companies. Timely payments can minimise potential disputes and legal hassles over outstanding dues. It encourages more transparent and accountable business practices in the MSME ecosystem," it said. 

According to the industry, Section 43B (h) is a positive step towards a more efficient and fair financial environment for MSMEs as it fosters a robust incentive for larger companies to prioritise payments made to MSMEs, which will eventually benefit the entire economy. 

Representatives of trade body CAIT in February met Finance Minister Nirmala Sitharaman for demanding to defer the clause implementation in the Income Tax Act by a year to April 2025.

The Confederation of All India Traders, in its memorandum to the finance ministry, welcomed the government's decision and underlined the importance of ensuring timely payments to the MSME sector within 45 days for uninterrupted cash flow for traders. 

However, it cited the "lack of clarity" surrounding the applicability of the law to traders and other related provisions, as grounds to suspend implementing the clause until sufficient clarification and information dissemination is achieved nationally. 

(With PTI Inputs)