The government of India in a measure to support the financial health of micro, small, and medium enterprises (MSMEs) in India, announced the enactment of a strict rule requiring payments to MSMEs to be settled within 45 days. Tax penalties on the due amount shall be levied if companies fail to follow the said rule.
As per two senior finance ministry officials, any revision to such a rule can only happen at the time of the Union Budget in July, highlighting the government’s firm stance on the case. Section 43B (h) in the Income Tax Act introduced by the Finance Act 2023, mandates timely payments to MSMEs to sustain uninterrupted cash flow and strengthen economic sustainability.
One senior finance ministry official mentioned that “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.”
Parliament had already approved the amendment showing an important transference in tax compliance norms, dictating that deductions for tax, duty, cess, or fees liable to be paid to the government can just be claimed on the actual payment, no matter when they were accrued or incurred.
Explaining the cause for the revision, a second finance ministry official stressed its role in ensuring prompt tax compliance, declaring, “The provision underscores the imperative for businesses to fulfil their tax obligations promptly, discouraging the practice of indefinitely deferring payments for tax benefits.”
Measures to postpone or change the rule prior next budget session in July are considered inappropriate since any revision should experience parliamentary scrutiny and approval. The Confederation of All India Traders (CAIT) urged a one-year postponement of the rule, quoting ambiguities and demanding attention among traders all across the country.
MSMEs have struggled with late payments from both public and private entities, resulting in challenges to their functional viability. The importance of timely payments is been stressed by Finance Minister Nirmala Sitharaman specifically during the rise of the pandemic, highlighting the commitment of the government to assist the MSMEs.
Diverse opinions for the amendment have been expressed by the Industry stakeholders. Considering its impact on business functioning, some regard it as a measure to strengthen MSMEs’ financial stability. Others highlight the demand for improved access to finance for buyers to promote timely payments to MSME suppliers.
The government to handle payment delays, has executed efforts like the Trade Receivables Discounting System (TReDS), easing prompt receivables for MSMEs by enabling the discounting of their invoices. The TReDS platform acts as a critical process for MSMEs to access timely funds, assuring their constant growth and viability in the evolving market trend.
