The government will implement a rule in FY25 requiring payments to micro, small and medium enterprises (MSMEs) to be made within 45 days, failing which companies will have to pay tax on the amount due.
Any change to the rule is possible only in the Union Budget in July, two senior finance ministry officials said. The government is not looking at deferring the rule by one year, as sought by traders, they said.
“According to the Finance Act 2023, companies need to make payments to the MSME sector within 45 days, which is slated to come into effect from April 1, 2024, else the companies cannot claim deductions on it,” a senior finance ministry official told Moneycontrol.
The Finance Act, 2023, introduced Section 43B (h) in the Income Tax Act to ensure timely payments are made to MSMEs and to maintain uninterrupted cash flow. If companies fail to make payments within 45 days, the amount will be added to their profit on which tax will have to be paid.
Parliament has already approved the amendment. The new rule implies that an employer, including a company, can claim a deduction for tax, duty, cess, or fee payable to the government only when it is actually paid, regardless of when it is accrued or incurred.
"The provision ensures that businesses fulfil their tax obligations promptly, rather than defer payments indefinitely for tax benefits," the second finance ministry official told Moneycontrol.
No change possible
Any change to the rule can be made only in the next budget in July, the official said, adding that no change is possible before that because it has to be approved by parliament.
"Even an ordinance route is not feasible as parliament will not be in session to approve it till July,” the official added.
The Confederation of All India Traders (CAIT) had sought postponement of the rule by a year, citing lack of clarity. CAIT secretary general Praveen Khandelwal said there is a need for greater awareness among traders nationwide about this provision.
MSMEs face mounting challenges due to delayed payments from public and private entities. Small businesses often operate on tight margins and payment delays disrupt their cash flow and hinder their operational capabilities.
From manufacturers to service providers, the ripple effects of delayed payments are felt throughout the MSME ecosystem. The income tax amendment aims at addressing the issue.
As per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the buyer is required to make payment to the MSME supplier within 45 days of the acceptance of goods or services rendered. Finance minister Nirmala Sitharaman has raised the issue several times after the pandemic and has asked businesses to make timely payments.
“It’s a good thing - extra teeth given by the new rule is good. This should be implemented stringently. There may be some hurt, but awareness was there. There could be loss of business. The new rule should continue and be enforced,” Ashok Saigal, co-chairman of the Confederation of Indian Industry MSME Council, told Moneycontrol.
He said the issue may be more of access to finance for buyers or a finance credit gap.
“It will be the cost of tax versus the cost of additional borrowing. If the buyer has been operating and has good credibility, it should not be difficult for him to get the finance. Businesses should find a way to get finance within 45 days to make payments to MSMEs.” Saigal said.
Additionally, the government has implemented measures to ensure compliance with these payment terms, such as the Trade Receivables Discounting System (TReDS), which helps MSMEs receive payments promptly by facilitating the discounting of their invoices.
The TReDS platform enables discounting of invoices/bills of exchange of MSME sellers against large companies, including government departments and public sector undertakings, through an auction mechanism to ensure prompt receivables at competitive market rates.
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