In a significant move aimed at bolstering the financial health of micro, small, and medium enterprises (MSMEs) in India, the government has announced the implementation of a stringent rule requiring payments to MSMEs to be settled within 45 days. Failure to comply with this regulation will result in companies facing tax penalties on the outstanding amount due.
According to two senior finance ministry officials, any potential alteration to this rule can only occur during the Union Budget in July, emphasizing the government's firm stance on the matter. The Finance Act 2023 introduced Section 43B (h) in the Income Tax Act, mandating timely payments to MSMEs to maintain uninterrupted cash flow and bolster economic sustainability.
One senior finance ministry official clarified, "Companies need to make payments to the MSME sector within 45 days, as per the Finance Act 2023, effective from April 1, 2024. Failure to adhere to this timeline will render companies ineligible to claim deductions, with the overdue amount subjected to taxation."
The amendment, already approved by Parliament, signifies a pivotal shift in tax compliance norms, dictating that deductions for tax, duty, cess, or fees payable to the government can only be claimed upon actual payment, regardless of when they were accrued or incurred.
Explaining the rationale behind the amendment, a second finance ministry official highlighted its role in ensuring prompt tax compliance, stating, "The provision underscores the imperative for businesses to fulfill their tax obligations promptly, discouraging the practice of indefinitely deferring payments for tax benefits."
Efforts to defer or modify the rule before the next budget session in July are deemed unfeasible, as any alteration must undergo parliamentary scrutiny and approval. The Confederation of All India Traders (CAIT) had requested a one-year postponement of the rule, citing ambiguities and urging greater awareness among traders nationwide.
MSMEs have long grappled with delayed payments from both public and private entities, posing significant challenges to their operational viability. Finance Minister Nirmala Sitharaman has repeatedly emphasized the importance of timely payments, particularly in the wake of the pandemic, underscoring the government's commitment to supporting MSMEs.
Industry stakeholders have expressed mixed sentiments regarding the amendment. While acknowledging its potential impact on business operations, some view it as a necessary measure to fortify MSMEs' financial resilience. Others emphasize the need for improved access to finance for buyers to facilitate timely payments to MSME suppliers.
To address payment delays effectively, the government has implemented measures such as the Trade Receivables Discounting System (TReDS), facilitating prompt receivables for MSMEs by enabling the discounting of their invoices. The TReDS platform serves as a vital mechanism for MSMEs to access timely funds, ensuring their sustained growth and viability amidst evolving market dynamics.
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