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The 45 Day Payment Rule

Nikhil Kothari , Last updated: 23 February 2024  
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These days everywhere you see people are talking about the 45-day payment rule (MSME Section 43B (h)) but often people are more confused rather than convincing so let's understand this entire concept from Nikhil and Akhil.

Nikhil: Hey Akhil, have you heard about this 45-day payment rule?

Akhil: No, I haven't. What's that all about?

The 45 Day Payment Rule

Nikhil: Well, it's a payment arrangement where you need to pay for purchases within 45 days without any interest or penalty.

Akhil: That makes sense. But is there any catch to it?

Nikhil: Well, usually, it's offered by suppliers or vendors to encourage more sales. However, if you don't pay within 45 days, you might incur interest or penalties, so it's crucial to manage your payments responsibly.

Akhil: Does this mean the supplier will not be able to give a credit period of more than 45 days?

Nikhil: Yes, but this does not apply to all. This applies to only those entities that are registered with MSME as Micro and Small Entities and are either a manufacturer or a service provider.

Akhil: Is this rule applicable to seller or buyer?

Nikhil: This rule is always applicable for purchase transactions, in other words whenever goods are purchased or services are availed, the provision of this scheme has to be considered. In other words, this scheme does not apply to sales-related transactions.

 

Akhil: Is this rule applicable for Capital expenditure or business expenses?

Nikhil: This rule will be applicable only on business expenses, meaning all such transactions that are debited in the Trading and Profit & Loss Account, like Purchase, Professional Fees, Rent, etc. This rule will not apply to capital expenditures like the purchase of fixed assets and payments related to it.

Akhil: Is this rule applicable to all micro, small, and medium enterprises?

Nikhil: No, this rule applies only to micro and small enterprises. Medium enterprises are kept out as of now.

Akhil: To which category of creditors this payment rule is applicable?

Nikhil: This rule is applicable only for manufacturers and service providers registered with MSME as Micro and Small Entity. The provision does not apply to Traders.

 

Akhil: To understand the status of MSME, can we take a self-declaration on their letterhead, whether they are registered with MSME or not?

Nikhil: The MSME certificate is the only means to understand whether the creditor is a Manufacturer, trader, or service provider and also whether he is registered under micro and small entities. So we need to collect the MSME certificate to ensure clarity.

Akhil: If the creditor is into manufacturing and trading, how can he be defined as a trader or manufacturer?

Nikhil: The MSME certificate provides the details on Major Activity with which one can ascertain whether the creditor is a manufacturer or trader and also whether the creditor is registered himself as a Micro or Small category.

Akhil: If the creditor refuses to inform his MSME status and also fails to provide an MSME certificate, what should we consider his status?

Nikhil: In this case, the creditor should be considered as a non-MME creditor.

Akhil: If I have multiple businesses, will each business carry a different MSME status?

Nikhil: No, the MSME certificate is provided PAN-wise. So there will be a single status considering total turnover in all the businesses.

Akhil: What are the categories of persons covered under this rule?

Nikhil: This rule applies to every category of person irrespective of your status be Proprietor, Partnership Firm, LLP, Company Etc. In other words, every person who is in business or profession is covered under this rule.

Akhil: If my business or profession is a tax audit case, then will this rule apply to me?

Nikhil: If you are into business or profession, this rule is applicable irrespective of whether you are into tax audit or not but if you are filing your income tax returns on a presumptive basis (section 44AD or 44AE) this rule will not be applicable.

Akhil: As per this rule within how many days do we need to make the payment to creditors?

Nikhil: In case there is no written agreement with the creditor then the payment should be cleared within 15 days of actual delivery of goods or services. But, if there is a written agreement, then the actual due date of payment or 45 days from the delivery of goods or services whichever is earlier shall be the due date within which the payment has to be cleared.

Akhil: The due date for payment be considered from the date of invoice or the date of actual delivery?

Nikhil: The due date shall be calculated from the actual delivery of goods in case of goods and the actual receipt of service in case of service.

For example, if the invoice date is 20.03.2024 but the actual delivery date is 22.03.2024, then the count of 45 days or 15 days (as the case may be) shall be from the actual delivery date which is 22.03.2024.

Akhil: In case there is an objection to goods or services received, then how to find the due date?

Nikhil: If there is an objection to goods or services received then it is important to object within 15 days of delivery of goods or receipt of services. In this case, the due date shall be counted from the date of clearance of objection.

For example, if the Invoice date is 20.03.2024, the Goods received date is 23.03.2024, the Objection raised date is 31.03.2024, and the Objection clear date is 04.04.2024, then the due date count shall be from 04.04.2024.

Akhil: If the buyer and seller come up with an agreement for a credit period of 3 months, then will this 45-day payment rule be applicable?  

Nikhil: Yes. Irrespective of the agreement between buyer and seller the maximum credit period allowed is 45 days, which means the agreement date or 45 days whichever is earlier the payment has to be cleared. Otherwise, the expenses or purchase deduction shall be considered in the year in which the actual payment is made.

Akhil: Is this rule applicable to opening balances of creditors?

Nikhil: No. This rule is only applicable on transactions entered after 1st April 2023.

Akhil: Will the payment be considered if ledger balances are closed by Journal voucher (JV) adjustments?

Nikhil: If both the buyer and seller party are the same then cross adjustment journal voucher shall be considered as payment. But, if both parties are different cross journal voucher adjustment shall not be considered as a payment.

Akhil: Will this rule apply to each invoice or only those invoices that are outstanding at the end of the financial year?

Nikhil: This rule applies to each invoice but its non-compliance impacts only on those invoices that are outstanding at the end of the financial year.

AKHIL: If there is a part payment of any invoice in the current year and the balance part is paid in the next year, then how will this rule applied?

Nikhil: A portion of the invoice that is paid shall be considered as expenditure in the current year and the balance unpaid amount shall be added back to profit as income.

Akhil: If I have issued a cheque to the creditor on 31st March, will this be considered as payment?

Nikhil: Yes. If a cheque is issued on 31st March and both the parties have recorded the same in their books, then it shall be considered as paid.

Akhil: Will this rule apply to the payment of bank interest?

Nikhil: No, this rule does not apply to payment of bank interest.

Akhil: Thank you Nikhil for clearing all my doubts. I'll keep an eye out next time I make purchases.

Nikhil: No problem Akhil, Always happy to share insights on Financial matters.

I hope this conversation between Nikhil and Akhil has given you all the information related to this 45 45-day Payment Rule.

The author can also be reached at nikhilkothari99@gmail.com


Published by

Nikhil Kothari
(CEO at Sequinox Business Advisories)
Category Income Tax   Report

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