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New 45-Day MSME Payment Rule Takes Effect, Signaling Shift in Business Dynamics

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The implementation of the 45-day MSME payment rule, as mandated by Section 43B(h) of the Income Tax Act, has begun, ushering in a new era for the MSME sector in India. This rule, introduced through the Finance Act 2023, aims to ensure timely payments from larger companies to MSMEs, significantly impacting the financial landscape for businesses of all sizes.

Key Points:

  1. Tax Implications: Under the new rule, larger companies must pay MSMEs within 45 days, as specified in written agreements. Failure to comply could result in the inability to deduct the expense from taxable income, potentially leading to higher taxes for the companies involved.
  2. Industry Responses: While some industry bodies have called for postponement of the rule’s implementation, citing concerns over its impact, others, notably the Federation of Indian Micro and Small & Medium Enterprises (FISME), view it as a potential game-changer for MSMEs. FISME emphasizes the importance of timely payments for MSMEs’ financial health and growth.
  3. Fears and Reassurances: Amid apprehensions that the rule could lead to large buyers sidelining MSME suppliers, FISME dismisses such fears as unfounded. The industry body asserts that the provision aims to instill discipline in commercial practices and strengthen MSMEs’ negotiating position, leading to more transparent and accountable business practices.
  4. Positive Outlook: The industry sees Section 43B(h) as a positive step towards creating a fair financial environment for MSMEs, with incentives for larger companies to prioritize payments to MSMEs. This, in turn, is expected to benefit the entire economy by ensuring smoother cash flow and fostering a more conducive business environment.

Recent Developments: Representatives from the traders’ body CAIT have urged the government to defer the implementation of the clause in the Income Tax Act until April 2025, citing a lack of clarity surrounding its applicability to traders and other related provisions. However, they also acknowledge the importance of ensuring timely payments to the MSME sector for maintaining uninterrupted cash flow.

Conclusion: As the new 45-day MSME payment rule takes effect, it brings both challenges and opportunities for businesses across the board. While concerns persist regarding its implications, the overall consensus is that timely payments are essential for the growth and sustainability of the MSME sector, laying the foundation for a more robust and equitable business environment in the long run.