The 45 day MSME payment rule will be imposed on 1 April. Know everything about it. 45 day Msme payment rule: A new regulation will come into effect on April 1st. It will impose timely payments to the Micro, Small, and Medium-Sized Enterprises (MSME) sector. As per this regulation, businesses are required to settle their debts to MSMEs within 45 days. Failure to comply with this rule will result in a tax liability on the remaining balance.
Section 43B(h): What is relation with the 45 day Msme payment rule?
The Finance Act 2023 introduced an amendment to the Income Tax Act by incorporating clause (h) into Section 43B. This amendment stipulates that tax deductions will only be permitted once the outstanding debts to MSMEs are paid within the specified 45-day period. The aim is to encourage larger companies to prioritize their settlements with MSMEs, thereby fostering a more robust economic environment for these smaller enterprises. It is applicable in all the transactions under the MSMED act 2006.
What is section 43B or 45 day Msme payment
This particular provision prohibits businesses from claiming deductions for expenses related to goods or services purchased from MSMEs if the payment is delayed beyond a specified timeframe. Essentially, failing to pay an MSME on time means you cannot reduce that expense from your taxable income. It potentially leads to an increase in your tax liability. In India, businesses typically recognize expenses as they are incurred (accrual basis), regardless of whether the payment has been made. However, Section 15 of the MSMED Act, 2006, in conjunction with the recently introduced Section 43B(h) of the Income Tax Act, stipulates that businesses must settle their payments with MSME Registered Enterprises within 15 days, or up to 45 days with a mutual agreement. Effective April 1, companies, sole proprietorships, partnerships, or LLPs are obligated to make payments to their suppliers registered as MSMEs within 15 days, or up to 45 days with an agreement.
Impact of 45 day Msme payment on MSME
CAIT is the traders’ body. It has reached out to Finance Minister Nirmala Sitharaman. It urged for a deferral of the clause in the Income Tax Act that pertains to MSME payments until April 2025. They have cited a “lack of clarity” regarding the applicability of the law to traders, among other provisions. The Clothing Manufacturers Association of India (CMAI) has estimated that MSME apparel manufacturers may suffer losses of Rs 5,000-7,000 crore in the January-March quarter due to this amendment. The CMAI alleges that the new rule has prompted retailers to cancel orders with MSMEs and instead opt for non-MSME players. You can read the report on Business Standard. Typically, the retail industry operates on a credit day cycle of 90-120 days for payments, which can sometimes extend to 180 days.“The expectation for retailers to immediately adjust their business models to comply with a 45-day payment cycle is highly unrealistic,” stated the CMAI in a note. They further added that a significant number of retailers are contemplating returning unsold merchandise to the manufacturers to relieve themselves of the payment obligation.
