Is Finance Ministry revising the new rule for payment to MSME within 45 days?


MSME: Section 43B amended under the Income Tax Act to insert Clause (h) by the Finance Act of 2023 to address the issue of delayed payments faced by MSMEs from their buyers is likely to be revised by the government. The clause, to be effective from April 1, 2024, disallows expenses to buyers on invoices from micro and small enterprises (MSEs) unless paid within 45 days (where agreement exists) and within 15 days if there is no agreement.

“The government is considering the request to see if there is any scope of the amendment to the clause so that the credit cycle of MSMEs is not disturbed and those not aware of the change get ample time to avoid any probability of liabilities,” a source in the know told.

Emails sent to the Finance Ministry didn’t elicit an immediate response for this story.

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Earlier this month, the Clothing Manufacturers Association of India (CMAI), the industry body for clothing manufacturers, had urged the government to extend the time limit for receiving payments from buyers to a maximum period of 90 days by March 31, 2025 and 60 days by March 31, 2026 before reducing it to 45 days by March 31, 2027.

“The garment industry, being extremely fragmented and informal in nature, is hugely dependent on intra-sector credit support extended among its players and does not enjoy credit facilities provided by the formal banking sector. The normal credit period in the industry ranges from 90 to 120 days, often extending to 180 days,” said CMAI in a statement.

In a letter to Finance Minister Nirmala Sitharaman on February 10, traders’ body CAIT also called for postponing the implementation of clause (h) to “given the lack of clarity surrounding the applicability of the law to traders and other related provisions,” it said in a statement.

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CAIT appealed to the government to postpone the implementation from April 1, 2024, to April 1, 2025, to provide traders with a one-year deferral period.

According to the government guidelines, retail and wholesale traders registered with the MSME Ministry through the Udyam portal are eligible for priority sector lending benefits only.

“The law is good and will streamline the payment mechanism but the awareness among traders is not there,” Praveen Khandelwal, Secretary General, CAIT told.

However, the new clause (h) may not turn out to be as impactful as it is envisaged.

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According to Rajiv Chawla, Founder and Chairman of SME network IamSMEofIndia, invoices issued before April 1, 2023, as well as outstanding dues as of March 31, 2023, remain unaffected by the amendment and no check or consequences apply to delays in payments to MSEs during the financial year if the payments are settled by March 31, 2024.

This implies that if an invoice raised on April 1, 2023, is paid on March 31, 2024 (after a full year), the expense will be permissible and consequently, there is minimal impact on payment delays during the year or delays in settling previous dues, he said.

Moreover, Chawla said the buyer’s responsibility is to settle all invoices as of 16th February’24 (where 45-day agreement) and invoices as of 17th March’24 (if no specific agreement exists) within the fiscal year, ending by March 31, 2024.

“So where’s the worry, unless someone actually has no intention of paying for purchases during this fiscal?” he added.

According to the delayed payment monitoring portal by the government MSME Samadhaan launched in October 2017, 1.76 lakh applications have been filed so far by MSMEs against their buyers for delaying payments. This involved Rs 41,105 crore stuck for such MSMEs of which only 34,551 cases involving Rs 6,052 crore have been disposed so far by the MSE Facilitation Councils in the country.

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