45-Day MSME Payment Rule

45-Day MSME Payment Rule

Sub: Eco

Sec: Fiscal Policy

Context:

• The SME Chamber of India has urged Finance Minister to continue the 45-day payment rule for MSMEs.
• Section 43B(h) of the Income Tax Act was introduced in the Finance Act 2023 to address delayed payments to MSMEs.

Key Points:

• 45-Day Payment Rule:
  • Larger companies must pay MSMEs within 45 days if there is a written agreement.
  • Failure to pay on time disqualifies the expense from being deducted from taxable income.
• Objective:
  • The rule aims to alleviate the issue of delayed payments, which is a significant challenge for MSMEs.
• Industry Body’s Request:
  • The SME Chamber of India emphasized not changing this rule despite pressure from larger corporates and multinational companies.
  • Timely payments are crucial for the survival and growth of the MSME sector.

Section 43B(h) of the Income Tax Act:

• Mandate:
  • Reinforces timely payments by making it a condition for expense deduction.
• Implications:
  • Ensures that companies are incentivized to pay MSMEs on time to avoid higher tax liabilities.
• Support for MSMEs:
  • Helps MSMEs maintain cash flow and avoid financial stress caused by delayed payments.
• Economic Impact:
  • MSMEs contribute significantly to the economy, and timely payments help sustain their operations and growth.

The 45-Day MSME Payment Rule 

To ensure timely payments to the Micro, Small, and Medium Enterprises (MSME) sector, a new regulation was implemented on April 1, 2024. This regulation mandates companies to settle their dues with MSMEs within 45 days.

Section 43B(h):

• Introduction: The Finance Act 2023 amended the Income Tax Act by adding clause (h) to Section 43B.
• Stipulation: Any payments owed to MSMEs not resolved within 45 days will not qualify for tax deductions until the payment is made.
• Objective: This clause aims to motivate larger entities to prioritize their settlements with MSME counterparts, thereby promoting a more robust economic environment for these smaller businesses.
• Applicability: Section 43B(h) applies to transactions involving the purchase of goods or services from enterprises registered under the MSMED Act, 2006.

Failure to Comply:

• Penalties: Failure to adhere to the 45-day timeframe results in penalties, including compounded interest penalties at three times the bank rate set by the Reserve Bank of India (RBI).
• Tax Implications: Businesses risk losing the ability to deduct payments made to MSEs from their taxable income.