The government is likely to relax the 45-day payment rule to MSMEs that has come into effect from April 1, 2023, as the rule may disrupt business practices due to its severity and lack of clarity. In order to provide relief to businesses the government has been mulling diluting the rule in the Union Budget.
The options may include extending the 45-day period to 60 days and even revoking the Income Tax Act amendment introduced in the interim Budget earlier this year, which will lead to companies paying higher taxes if payments to MSME are made beyond 45 days, a senior government official said.
According to Section 43B(h) of the Income Tax Act, introduced through the Finance Act 2023, if a larger company does not pay an MSME on time — within 45 days in case of written agreements — it cannot deduct that expense from its taxable income, leading to potentially higher taxes. A number of businesses, including Confederation of All India Traders (CAIT), have since made representations against it to the Finance and MSME ministries, highlighting the trade issues.
“The MSME Ministry has had discussions with the Finance Ministry on the 45-day payment rule. Some resolution is likely in the July Budget. There are options. Resolution has to be done, it’s in a flux. The MSME Ministry hasd submitted a proposal to the Finance Ministry,” the official told Moneycontrol.
The amendment was brought in for MSMEs to get timely payment but there are a lot of issues in the 45-day payment rule. Due to the stringent payment rules, the companies now may ask them to give up their MSME registration in order to do business with them, he said.
The 45-day payment rule is already a part of the MSME Act, but it was not being implemented. In order to make it effective, it was aligned with the Income Tax Act and thus the amendment was brought in the interim Budget 2024.
“The MSME Ministry asked the Finance Ministry to administer the 45-day rule through the Income Tax amendment, which was not correct. The 45-day payment rule is very strict,” he said.
The government is likely to temper it down, which will be a difficult choice.
The MSME Act may be amended by relaxing the 45 day period to 60 days. The credit term can be extended even to six months, but the working capital issues of the MSMEs will have to be kept in mind, he said.
Or the income tax amendment introduced may be revoked, which will be a decision taken by the Finance Minister, he added.
Or the government may also allow businesses to make payments to MSMEs by due date and be eligible for income tax deductions. The 45-day rule will hold no importance then, the official said.
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