News Excerpt:

The Supreme Court has declined a plea by MSMEs challenging a rule under the Income Tax Act under which businesses are prohibited from extending credit to buyers beyond 45 days.

What is the 45-day MSME payment rule?

• To ensure timely payments to the Micro, Small and Medium Enterprises (MSME) sector, a new regulation was implemented from April 1. 
• This regulation requires companies to settle their dues with MSMEs within 45 days. 

What is Section 43B(h)?

• The Finance Act 2023 introduced an amendment to the Income Tax Act by adding clause (h) to Section 43B. 
• This clause stipulates that any payments owed to MSMEs, not resolved within 45 days, will not qualify for tax deductions until the payment is made. 
• The aim is to motivate larger entities to prioritise their settlements with MSME counterparts, thereby promoting a more robust economic environment for these smaller businesses.
• Section 43B(h) is applicable to transactions that involve the purchase of goods or services from enterprises registered under the MSMED Act, 2006.

Failure to comply with the rule:

• Failure to adhere to a 45-day timeframe would result in penalties, including compounded interest penalties at three times the bank rate set by the Reserve Bank of India (RBI). 
• The businesses risk losing the ability to deduct payments made to MSEs from their taxable income.

Government’s reasoning to implement the rule:

• 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.

Impact of new rule on the MSMEs:

• The new provision might lead larger buyers to bypass small and medium suppliers and instead opt to purchase from unregistered enterprises.

MSME’s stand on the new rule:

• The industry said Section 43B (h) is a positive step towards a more efficient and fair financial environment for MSMEs.
• The rule creates a strong incentive for larger companies to prioritise payments to MSMEs, ultimately benefiting the entire economy.
• Industry is in support of the government's decision as it will enable uninterrupted cash flow for traders.
• However, citing a "lack of clarity" regarding the applicability of the law to traders and other related provisions, they have urged the government to suspend the implementation of the clause until sufficient clarification and nationwide dissemination of information could be achieved.