Regulation of timely payments to MSMEs will take effect on April 1

As per the Finance Act 2023’s Section 43B(h) of the Income Tax Act, a larger firm may face greater taxes if it fails to pay an MSME within the stipulated timeframe of 45 days for written agreements.

Money

By Sneha Sengupta On Mar 31, 2024

On April 1, the Income Tax law that prohibits companies from deducting taxes for payments made to MSMEs for the provision of goods and services after 45 days will go into effect.

The Federation of Indian Micro and Small & Medium Enterprises (FISME) believes that the new regulation has the potential to be a game-changer for MSMEs, notwithstanding the views of some industry associations urging the government to delay the implementation of the new payment rules.

MSMEs worry that because of this clause, big customers may start to sidestep MSME suppliers and begin purchasing from non-MSMEs or from MSMEs who aren’t registered with Udyam. FISME acknowledged that some MSMEs and larger enterprises have expressed anxiety due to Section 43B(h), but stated that “such fears are unfounded.”

Representatives of the merchants’ association CAIT made a demand to Finance Minister Nirmala Sitharaman in February, requesting a one-year delay in the application of the Income Tax Act’s section till April 2025.

“The provision strengthens MSMEs’ position when negotiating payment terms with larger companies. Timely payments can minimise potential disputes and legal hassles over outstanding dues. It encourages more transparent and accountable business practices in the MSME ecosystem,” it added.

The sector stated that because Section 43B (h) provides a significant incentive for larger corporations to give payments to MSMEs priority, it is a positive step towards a more equitable and efficient financial environment for MSMEs.

The government’s move was applauded by CAIT in a message to the finance ministry, wherein it was emphasized that in order to sustain traders’ cash flow, prompt payments to the MSME sector must be made within 45 days.

It had, however, requested the government to halt the clause’s implementation due to the “lack of clarity” around the law’s applicability to traders and other relevant provisions.