In a move aimed at bolstering the Micro, Small, and Medium Enterprises (MSMEs), the Indian government will enforce a rule requiring payments to MSMEs within 45 days starting April 1, 2024. Failure to comply will result in companies having to pay tax on the overdue amount, as mandated by Section 43B (h) introduced in the Income Tax Act through the Finance Act, 2023.
Senior finance ministry officials clarified that any modification to this rule can only occur in the next Union Budget in July, as it requires parliamentary approval. Despite requests for a one-year deferment by the Confederation of All India Traders (CAIT), the government remains firm on implementing the rule as scheduled.
The new provision ensures that companies can claim deductions on tax, duty, cess, or fee payable to the government only when the payment is actually made, irrespective of when it is accrued or incurred. This move aims to prompt businesses to fulfill their tax obligations promptly and discourages deferring payments for tax benefits.
Ashok Saigal, co-chairman of the Confederation of Indian Industry MSME Council, welcomed the new rule, emphasizing its importance in addressing delayed payments that adversely affect the MSME ecosystem. He acknowledged the potential challenges but stressed the need for strict implementation.
The government, recognizing the challenges faced by MSMEs due to payment delays, has implemented measures such as the Trade Receivables Discounting System (TReDS) to facilitate prompt receivables through an auction mechanism. The TReDS platform enables discounting of invoices/bills of exchange of MSME sellers against large companies, including government departments and public sector undertakings.
Despite concerns about potential business loss, stakeholders in the MSME sector, like Saigal, advocate for the stringent enforcement of the new rule, considering it a positive step in empowering small businesses.
