Rule on timely payment to MSMEs comes into force from Monday

The Income Tax rule disallowing businesses from claiming tax deductions for payments beyond 45 days to MSMEs for supply of goods and services will come into effect on Monday.

According to Section 43B(h) of the Income Tax Act, introduced through 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.

Some industry bodies have urged the government to postpone implementation of the new payment rules, the Federation of Indian Micro and Small & Medium Enterprises (FISME) is of the opinion that the new rule has the potential to be a game-changer for MSMEs.

MSMEs fear that due to this provision, large buyers could cold-shoulder MSME suppliers and start buying either from those MSMEs that are not registered with Udyam or from non-MSMEs.

Acknowledging that Section 43B(h) has caused some apprehensions among both MSMEs and larger businesses, FISME said, "such fears are unfounded".

"Replacing dependable suppliers just because a large company does not want to pay them in time is a ridiculous conclusion to draw. In any case, in the worst eventuality, the tax thus paid over such delays can be adjusted the following year when the company pays the supplier. But it does instill discipline in commercial practices," the industry body said.

On the other hand, FISME added that despite the apprehensions, Section 43B(h) has the potential to be a game-changer for MSMEs. MSMEs will receive payments faster, which is crucial for their financial health and growth, it said.

"The provision strengthens MSMEs' position when negotiating payment terms with larger companies. Timely payments can minimise potential disputes and legal hassles over outstanding dues. It encourages more transparent and accountable business practices in the MSME ecosystem," it said.

The industry said Section 43B (h) is a positive step towards a more efficient and fair financial environment for MSMEs as it creates a strong incentive for larger companies to prioritise payments to MSMEs, ultimately benefiting the entire economy.

In February, representatives of the traders' body CAIT had called upon Finance Minister Nirmala Sitharaman and demanded that the implementation of the clause in the Income Tax Act be deferred by a year to April 2025.

In its memorandum to the finance ministry, CAIT had welcomed the government's decision, highlighting the significance of ensuring timely payments to the MSME sector within 45 days to maintain uninterrupted cash flow for traders.

However, given the "lack of clarity" surrounding the applicability of the law to traders and other related provisions, it had urged the government for suspension of the implementation of the clause until sufficient clarification and information dissemination are achieved nationwide.