Finance Minister hints at reconsidering the 45-Day MSME payment rule

Finance Minister Nirmala Sitharaman on May 28 hinted at the possibility of the government reconsidering changes made to the income tax rules mandating payments to micro, small and medium enterprises (MSMEs) within 45 days, failing which companies will have to pay tax on the amount due.

The Finance Minister stated that MSMEs could submit requests for recognition in the upcoming July budget if they require a longer payment period.

During a meeting with MSMEs in Ludhiana, the minister made sure that these businesses could continue to receive tax breaks. She emphasized that the businesses can receive the same relief if they make timely payments, which guarantees that they will benefit even though the current payment has been scheduled. If MSMEs and the industry decide they don’t want this change and will resolve it among themselves, then please make representations. We will definitely address the same issue in the July budget.

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A larger company will pay higher taxes if it fails to file an MSME within 45 days of entering into a written agreement, as required by Section 43B(h) of the Income Tax Act, which was introduced through the Finance Act 2023. This is because the company will not be able to deduct the expense from its taxable income.

This was done to motivate larger entities to prioritise their settlements with MSME counterparts, thereby helping smaller businesses tide over any cash crunch.

The finance minister’s indication on potentially relaxing the 45-day payment rule for MSMEs comes after stakeholders allegedly highlighting how the severity and lack of clarity surrounding the mandate could disrupt established business practices and trade.

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The government has pleaded with certain industry bodies to postpone enactment of the new payment regulations, the Federation of Indian Micro and Small & Medium Enterprises (FISME) believes that the new rule has the prospect to be a game-changer for MSMEs.

MSMEs worry that because of the same provision, major vendors may cold shoulder them and start making purchases from non-MSMEs or from MSMEs that aren’t registered with Udyam. While acknowledging that MSMEs and larger businesses have experienced some uncertainty as a result of Section 43B(h), FISME stated that “such fears are baseless.”

The trade association claims it is incorrect to assume that the big company’s decision to replace reliable suppliers is the only reason they aren’t getting paid on time. In any case, when the business pays the supplier the following year, the tax filed over these delays may be modified due to unfavourable circumstances. The same applies to commercial measures as well.

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