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  • Writer's pictureSophia Satapathy

How the New 45-Day MSME Payment Rule Will Impact Businesses and Consumers in India



45 Day MSME Payment Rule

A strict new rule is coming for businesses delaying payments to MSMEs. Starting April 1, 2024, companies must clear all dues to small suppliers within 45 days or face stiff penalties.

Many MSMEs struggle due to large corporations and government departments taking months to pay bills. This impacts their cash flow and ability to run operations smoothly. The new 45-day rule aims to fix this issue. According to the rule, if a company fails to pay an MSME within 45 days of delivery or service, then the due amount cannot be claimed as a tax deduction by the company.

Essentially, it means the unpaid amount will be added to the company's taxable income, resulting in higher taxes. The rule is being implemented through an amendment in the Income Tax Act as per the Finance Act 2023. It is applicable to all companies and aims to ensure MSMEs get timely payments. This will improve their financial health. It will also discourage businesses from intentionally delaying payments to MSMEs.

Background on MSMEs in India

MSMEs, or micro, small, and medium enterprises, are essential for India's economy. They help create more jobs and produce many goods and services that we use daily.

MSMEs face some challenges. One big challenge is that large companies or government departments take a long time to pay for the products and services that MSMEs provide. Sometimes, payments are delayed by more than 45 days.

This causes cash flow problems for MSMEs. With delayed payments, MSMEs find it difficult to pay their expenses like wages, taxes, loan EMIs, etc. They may even need help to buy raw materials to make more products.

To help MSMEs, the government has ruled that all payments must be made within 45 days of providing goods or services. This rule will take effect on April 1.

If payments are delayed beyond 45 days, the large company will have to pay some extra tax. This rule is expected to ensure timely payments for MSMEs so they avoid financial issues due to non-payment or late payment.

While this new rule aims to support MSMEs, some traders say there is not enough awareness about it. They want companies to have more time to understand and follow it. However, the government has decided to implement it from April 1 as planned.

Key Details of the New MSME Payment Rule

The key details of the new rule on timely payment to MSMEs:

  • The rule was announced in the Finance Act 2023 and approved by the government.

  • It amends Section 43B of the Income Tax Act.

  • Section 43B(h) states that a large company cannot claim a tax deduction on an MSME's expense if it does not pay it within 45 days of receiving the goods/services.

  • This means the unpaid amount will be added to the company's taxable income, resulting in higher tax outgo.

  • The aim is to ensure timely payment to MSMEs and protect their cash flows. MSMEs often face delays and non-payment of dues from large buyers.

  • There were demands to postpone the rule's implementation by a year to 2025 to allow more time for compliance.

  • However, the government has decided to enforce it from April 1, 2024, to benefit MSMEs.

  • It is expected to discipline commercial practices by incentivizing large firms to prioritize MSME payments on time.

Official Comments on Implementation

  • Two senior finance ministry officials have clarified that no changes are being planned to the 45-day MSME payment rule set into effect from April 1, 2024. Any change to the rule can only be made in the next Union Budget in July.

  • The officials stated that, according to the Finance Act 2023, companies must pay MSMEs within 45 days of receipt of goods or services. If payments are not made within this timeframe, companies cannot claim tax deductions for such expenses.

  • The provision was introduced to ensure timely payments to MSMEs and maintain their cash flow. It aims to bring more transparency and accountability in business practices vis-a-vis MSMEs.

  • While some industry bodies have urged the postponement of the rule due to its lack of clarity, the finance ministry maintains that amendments can now only be proposed in the July budget after approval by Parliament. Changes are only feasible before that through ordinances or other means.

  • The rule implementation aims to incentivize larger companies to prioritize MSME payments on time. It is expected to benefit the MSME sector and the broader economy ultimately. However, MSMEs and larger businesses will need to adjust their payment cycles per the new timelines.

Industry Reaction

The new rule that requires larger companies to make payments to MSMEs within 45 days has received mixed reactions from industry bodies.

MSME councils are largely supportive of strict enforcement of the rule. Ashok Saigal of the CII MSME Council said it is a good move as it will provide extra protection to MSMEs. He believes some businesses may face initial difficulties adjusting, but awareness exists. Strict implementation of the rule is needed, he added.

However, traders' associations have raised some concerns. The Confederation of All India Traders (CAIT) has asked the government to postpone the rule by a year. According to CAIT, there is a lack of clarity regarding the law's applicability to traders and related provisions. It says more time is needed for awareness campaigns and clarification across India before implementing the rule.

CAIT fears traders may face compliance issues due to a lack of complete information. It has urged the government to delay the rule until next year after ensuring nationwide dissemination of details. Some industry experts also point out that larger buyers may avoid MSME suppliers due to the new provision.

While MSME councils see the rule as a step to protect small businesses, traders' bodies feel more preparation is required before strict enforcement. Both sides agree that widespread awareness campaigns are crucial for the smooth implementation of this important rule.

Measures to Ensure Compliance

Here are some key points about measures to ensure compliance with timely MSME payments:

  • TReDS platform stands for Trade Receivables Discounting System. It is an electronic platform that facilitates discounting invoices/bills for MSMEs.

  • On TReDS, large companies/buyers and banks bid for the invoices uploaded by MSMEs. By discounting their invoices, MSMEs get the money quickly at competitive rates.

  • This helps MSMEs get payments faster instead of waiting for months. The early payment improves their cash flow.

  • The government wants more MSMEs and large firms to use TReDS. It helps ensure payments as per the 45-day MSME payment rule.

  • The income tax law also contains a provision requiring large firms to pay a penalty or higher tax if MSME bills are not paid within 45 days.

  • The MSME Ministry runs a Samadhan portal for MSMEs to register delayed payment cases against large buyers like government departments.

  • Ministers regularly remind large companies to make timely MSME payments. Some sectors, like pharma, have also issued guidelines to members on this.

  • Overall, the goal is to improve cash flow for MSMEs using platforms like TReDS and also penalties to ensure payment compliance by large buyers. This helps small businesses operate smoothly.

Expected Impact on Businesses

The expected impact on businesses are:

Importance of on-time MSME payments for tax benefits

Businesses must pay MSMEs within 45 days to receive tax benefits. If payments are delayed, businesses will not be able to deduct the amount when filing taxes, which can increase their tax cost.

Potential costs of non-compliance or additional borrowing

If businesses do not pay MSMEs on time, they will have to pay taxes on the amount without deductions, increasing their tax outgo. To get tax benefits, they may need to borrow funds to pay MSMEs on time. The extra borrowing will increase interest costs for businesses.

Non-compliance with the 45-day rule may also attract penalties in the future, which will increase costs. MSMEs may also refuse to supply if payments are delayed, disrupting business operations.

So, the new rule ensures MSMEs receive timely payments. It also provides an incentive for businesses to clear MSME dues within 45 days to avail themselves of tax benefits and avoid extra costs like high taxes, interest payments, and penalties. Prompt payments under the rule will help businesses and MSMEs maintain smooth cash flows.

Impact on Consumers

The impact on the consumers:

  • If big companies have to pay MSMEs within 45 days, this may increase their costs. They may pass some of this additional cost on to consumers by raising the prices of products and services.

  • Higher prices could contribute to inflation. Inflation means the overall price of goods and services is increasing. It affects everyone as our money doesn't go as far.

  • Inflation and higher costs for companies could slow down economic growth. Companies may have less money to expand and hire more people, and people may also have less purchasing power.

  • However, timely payments to MSMEs are good for their cash flow and business. Healthy MSMEs can continue supplying products at reasonable prices. They may also create more jobs as they grow.

  • It's difficult to say for sure how much prices will increase. A lot depends on how efficiently companies manage costs. The impact on inflation and growth also depends on overall economic conditions.

  • The policy aims to create a stronger MSME sector that supports fair competition in the long run. This could benefit both businesses and consumers. However, any changes may initially cause some disruptions as all sides adjust.

Conclusion

The new rule requiring large companies to make payments to MSMEs within 45 days comes into effect from April 1. This means companies cannot claim tax deductions on late payments to MSMEs after this date. The government has said no changes can be made to this rule until the next Union Budget in July.

This new rule aims to help MSMEs by ensuring timely receipt of payments. It will improve cash flows for small businesses. While some large companies have concerns about compliance, working with platforms like TReDS can help resolve payment delays. The rule addresses the crucial problem of late payments that many MSMEs grapple with overall. Timely payments will help MSMEs operate smoothly and contribute to the growth of small businesses.

FAQs

What is the definition of an MSME under this rule?

The rule refers to micro, small, and medium enterprises defined under the MSMED Act, 2006, based on investment and turnover criteria.

Are there any exceptions or relaxations provided?

The rule does not provide any explicit exceptions. However, businesses may seek to negotiate payment terms with MSMEs on a case-to-case basis.

What documents need to be provided for tax filing regarding MSME payments?

Businesses will need documents like purchase invoices, payment receipts, account statements, etc., to prove timely payments for claiming tax deductions.

What happens if the MSME itself delays providing invoices or documents?

The rule does not account for MSME-side delays. Businesses must make all efforts to make payments within 45 days of purchase.

How will interest for late payments be treated under the new rule?

Interest on late MSME payments will continue to be governed under the MSMED Act. The new rule only applies to tax compliance and deductions.

Can MSMEs themselves be penalized for any delays in supplying goods or services?

The rule primarily targets large businesses and buyers who must make timely payments. MSMEs face their regulations for supply-side delays or performance issues.


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