Starting from the fiscal year 2025, the government will introduce a regulation mandating that payments to micro, small, and medium enterprises (MSMEs) must be settled within a 45-day period. Failure to comply will result in companies facing taxation on the outstanding amount, as revealed by senior officials from the finance ministry.

The possibility of altering this rule is limited to the Union Budget session in July, according to two high-ranking finance ministry officials. They clarified that the government has no intentions of postponing the rule by one year, despite requests from traders.

Quoting a senior finance ministry official, Moneycontrol reported, “As per the Finance Act 2023, companies are obligated to clear payments to the MSME sector within 45 days, starting from April 1, 2024, or else they forfeit the right to claim deductions on it.”

Introduced through the Finance Act, 2023, Section 43B (h) in the Income Tax Act ensures timely payments to MSMEs, thereby maintaining uninterrupted cash flow. Companies failing to adhere to the 45-day payment deadline will have the overdue amount added to their profit, subjecting them to taxation.

The amendment has received parliamentary approval. Essentially, it stipulates that deductions for tax, duty, cess, or fees payable to the government can only be claimed upon actual payment, irrespective of when the liability was incurred.

“The provision aims to encourage businesses to fulfill their tax obligations promptly, rather than delaying payments indefinitely for tax benefits,” stated the second finance ministry official to Moneycontrol.

It was emphasized that any changes to the rule can only be made during the subsequent budget session in July and require parliamentary approval. Therefore, no alterations are possible before then.

The Confederation of All India Traders (CAIT) had requested a one-year postponement of the rule due to ambiguity. CAIT secretary general Praveen Khandelwal stressed the importance of raising awareness among traders nationwide regarding this provision.

Delayed payments from public and private entities pose significant challenges for MSMEs, disrupting their cash flow and operational capabilities, particularly given their narrow profit margins.

The implementation of this new rule is seen as a positive step towards addressing these challenges. Finance Minister Nirmala Sitharaman has repeatedly highlighted the issue, urging businesses to ensure timely payments, especially in the aftermath of the pandemic.

While some industry experts anticipate initial challenges, they recognize the importance of enforcing the new rule to ensure timely payments to MSMEs. The Confederation of Indian Industry MSME Council Co-chairman expressed support for the rule, emphasizing its stringent enforcement.

Additionally, the government has introduced measures like the Trade Receivables Discounting System (TReDS) to facilitate compliance with payment terms. TReDS enables MSMEs to receive prompt payments by facilitating the discounting of their invoices through an auction mechanism.