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FM Sitharaman: Section 43B may be reverted if MSMEs Accept Delayed Payments Over 45 Days

Last updated: 01 June 2024


In a significant development for Micro, Small, and Medium Enterprises (MSMEs), Finance Minister Nirmala Sitharaman announced on Tuesday that the government is open to repealing the recent changes to Section 43B of the Income Tax Act. This consideration comes in response to concerns raised by MSMEs regarding payment timelines from their buyers.

Addressing Payment Delays

During an interaction with MSMEs and local industries in Ludhiana, Sitharaman acknowledged the challenges faced by small businesses due to delayed payments. The government had introduced a 45-day payment rule to the Income Tax Act in 2008, aimed at ensuring timely payments to MSMEs from their buyers. However, recent amendments requiring payments within 45 days for tax deductibility have sparked concerns.

FM Sitharaman: Section 43B may be reverted if MSMEs Accept Delayed Payments Over 45 Days

Potential Repeal of Stringent Payment Rules

Sitharaman emphasized the government's willingness to revert to the original rules if MSMEs prefer flexibility in payment timelines. "If MSMEs want relaxation in payment made by their buyers without the 45-day limit, whether over 45 days, 150 days, or a year and further, then it is easy to make the changes. We will change it and go back to the original rule," she stated.

Background on Section 43B Clause (h)

The recent budget introduced a new clause (h) under Section 43B, effective from April 1, 2024, to address delayed payments. This clause stipulated that expenses to buyers on invoices from micro and small enterprises would be deductible only if paid within 45 days (with an agreement) or 15 days (without an agreement) within the fiscal year. This change aimed to improve cash flow and business growth for MSMEs.

MSMEs' Response and Concerns

While the amendment was intended to support MSMEs, various industry groups, including the Clothing Manufacturers Association of India (CMAI) and the Federation of All India Vyapar Mandal (FAIVM), have raised concerns. They argue that the stringent payment timelines disrupt their working capital flow, with typical payment cycles extending up to six months. "The changes made to the IT Act forcing them to pay within 45 days would result in business loss for MSMEs as buyers would prefer sellers outside the ambit of the MSME definition," they noted.

Call for Policy Revision

Representatives from various trade associations have been advocating for a rollback of the new clause. Jayendra Tanna, President of FAIVM, highlighted the dilemma faced by traders who comply with timely payments to their MSME sellers but struggle with longer payment cycles from their own buyers. "This means while we continue to make payments to our MSE sellers on time, the payment cycle with our buyers is often more than 45 days and hence we are stuck this way leading to working capital issues," Tanna explained.

Government's Consideration and Future Steps

Sitharaman confirmed that any changes to the rule would be addressed in the full budget session in July under the new government. The decision will be based on the representations submitted by MSMEs, aiming to balance the need for timely payments with the operational realities of small businesses.

Current Scenario of Delayed Payments

As of May 29, over 1.91 lakh delayed payment applications have been filed by MSMEs since October 2017, involving a total of Rs 43,532 crore. However, only 36,593 cases involving Rs 6,287 crore have been resolved, according to data from the MSME Ministry's delayed payment monitoring portal, MSME Samadhaan.

The government's flexibility in addressing these concerns reflects its commitment to supporting MSMEs, ensuring their growth and sustainability in the competitive market environment.

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