Section 43B(h) of the Income Tax Act, which was enacted through the Finance Act 2023 states that larger corporations that fail to remit payment to Micro, Small, and Medium Enterprises (MSMEs) within the stipulated 45 days, as outlined in written agreements, will be unable to claim that expense as a deduction from their taxable income. This could result in an increase in their tax liabilities.

This regulation is designed to promote timely payments to MSMEs and encourages adherence to payment schedules to prevent financial penalties and tax-related consequences.

Advantages to MSME

The 45-Day MSME payment regulation offers substantial advantages to MSMEs by ensuring they receive payments promptly for their products and services. By requiring buyers to settle their accounts within 45 days of receiving goods or services, the regulation aids MSMEs in maintaining consistent cash flow and financial health. Failure to remit payment to the MSME within the stipulated 45 days results in companies being unable to claim deductions. In essence, if payments are not made within the specified period, companies forfeit the benefit of deducting those expenses from their taxable income, thereby incurring tax liabilities on the overdue amounts.

Impact of the 45-Day MSME Payment Regulation on Small Enterprises

The 45-Day MSME Payment Regulation significantly influences small enterprises, providing numerous benefits:

• Increased Cash Flow
• Reduction in Financial Stress
• Providing Financial Stability
• Enhanced Business Confidence
• Bridge Cash Flow Gaps
• Economic Development
• Healthier Business Ecosystem

Drawbacks Faced by MSME

There is concern among MSMEs that this regulation may prompt larger buyers to neglect them, opting instead to procure goods from MSMEs that are not registered with Udyam or from entities that do not qualify as MSMEs.

The amendment was introduced to ensure that MSMEs receive timely payments; however, numerous concerns have been expressed by these enterprises. Sources indicate that there is apprehension that large corporations, in an effort to protect their interests, may redirect their sourcing needs to larger firms or compel their vendors to relinquish their MSME registration in order to continue their business relationships.

Latest Developments

In February, the Confederation of All India Traders (CAIT) engaged in discussions with Finance Minister Nirmala Sitharaman, advocating for a one-year extension of the 45-day payment regulation for Micro, Small, and Medium Enterprises (MSMEs), with a proposed new implementation date of April 2025. While CAIT endorses the concept of prompt payments to facilitate a consistent cash flow for MSMEs, it has raised concerns regarding the ambiguity surrounding the law's applicability to traders and other pertinent aspects. The organization is requesting a delay to enable improved clarification and wider distribution of information.

Recognizing that Section 43B(h) has raised concerns among both MSMEs and larger enterprises, FISME stated, "These apprehensions are baseless."

The Union Budget 2024-25 introduced a range of initiatives designed to support micro, small, and medium enterprises; however, it did not address the anticipated review of the recent regulation requiring payments to these businesses within 45 days of the receipt of goods or services.

(The above article was researched and compiled by Sneha Tiwari, Senior Content Writer at TradeIndia. An avid reader, Sneha writes on various topics, including business, fashion and sports.)