Delays in payments in your business are among the most significant challenges for you as a business owner. To resolve this, the government has launched the MSME 45-day payment rule for micro, small, and medium (MSME) enterprises. Buyers must settle their dues within 45 days of obtaining goods or services. This government rule protects the financial well-being of small businesses. This procedure strengthens MSMEs’ ability to perform smoothly and have prosperous cash flows. This blog offers tips on the MSME 45-day payment rule, its advantages, and why it comprises a milestone for India’s economic development.
Overview of MSME 45-day Payment Rule
The Finance Act, 2023 incorporated the MSME 45-day payment rule u/S 43B (h), which has been in effect since April 1, 2024. If companies do not reimburse MSMEs within 45 days or according to the date on their contract for the goods or services they purchased, they can’t subtract that cost from their taxable income for the year it happened. The companies can claim it solely in the year they disburse it, making them pay more taxes than proposed.
This new MSME 45-day rule intends to solve the working capital concern in the MSME sector by guaranteeing prompt payments. It will be enforced in the 2024-2025 assessment year and the forthcoming years.
Time Limit to Make a Payment
The time limit rests on the contract between the buyer and seller. If a written agreement is present, then the buyer needs to pay within the specified date or within 45 days from the purchase date, whichever is earlier. If no contract exists between the buyer and the MSME seller, the buyer must complete the payment within 15 days. If there is a written agreement, payment shall be made according to the specified timeline, not exceeding 45 days.
For instance, a small ceramics business vends its products to a big retail chain. As per standard industry practice, the retail chain usually takes nearly 90 to 120 days to resolve its invoices with the little business.
Since April 1, 2024, the retail chain needs to resolve its outstanding payments with the ceramics business within 45 days from the invoice date. So, if the little ceramics business submits an invoice to the retail chain on April 15, they should reimburse the invoice on or before May 30. If the retail chain prolongs its payment beyond this duration, it encounters a tax liability on the outstanding amount in the current financial year. This will likely raise the company’s expenses.
Meaning of MSME
MSME comprises an acronym for Micro, Small and Medium Enterprises and is broadly classified into two separate divisions. One constitutes the manufacturing segment, which manufactures goods for any industry, and the other one comprises the service enterprise involved in providing services. They come under the following, based on the income earned by each enterprise:
| Type of Enterprise | Investment (Rs) | Turnover (Rs) |
| Micro | 1 crore | 5 crore |
| Small | 10 crore | 50 crore |
| Medium | 50 crore | 250 crore |
Applicability of Section 43B (h)
Section 43B (h) applies when an enterprise buys goods or services from a supplier enrolled under the MSMED Act, 2006. Essentially, the buyer’s registration under the MSMED Act is not needed to apply this clause. This ensures that the advantages of Section 43B (h) are present as long as the supplier is enrolled under the MSMED Act.
Non-Applicability of Section 43B (h) to Traders
Section 43B (h) exclusively targets prompt payments to micro and small enterprises enrolled under the MSMED Act, 2006. Wholesale and retail traders can enrol under Udyam only to make use of Priority Sector Lending benefits. They do not come under the MSMED Act’s description of an ‘enterprise’ qualified for other advantages, including those u/S 43B (h).
Example: Mr. X purchased goods from Mr. Y, who is a trader. Does Section 43B (h) apply? No, Section 43B (h) does not apply because Mr. Y is a trader. The provision applies only to disbursements made to suppliers that are either service providers or manufacturers, not traders.
Penalties for Lapse in Payments to MSMEs
In the event of delayed payment to an MSME, interest is compelling.
Rate of interest: Compound interest at thrice the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is due: The date according to the agreement or the day immediately following after the expiry of the duration of 15 days from the day of acknowledgement or the day of deemed acknowledgement of any goods or services by a purchaser from a supplier (appointed day), as the case might be.
According to the Income Tax Act of 1961, this interest cannot be deducted as an expense.
Benefits of 45 Days Payment Rule
Easy Payment Cycle: Section 43B (h) encourages large organizations or enterprises to settle their dues with micro, small, and medium enterprises within 15 days where no written agreement exists and 45 days with an agreement. This way, MSMEs are guaranteed a timely cash flow, which is vital for their growth and sustainability.
Fewer Conflicts: Once payments are remitted promptly, a lesser number of disputes and court cases will occur due to non-payment of dues. Therefore, MSMEs and bigger enterprises save time and human capital.
Better Negotiating Potency: This ensures more bargaining power for the MSMEs when negotiating payment terms with bigger enterprises or companies. They can confidently push for deadlines aligned with the fixed time frame, as they stay assured of outcomes in the event of delayed payments.
It lowers financial stress for MSMEs, helps them schedule their finances better and keeps a balanced budget without needing to borrow short-duration, high-interest loans.
The new 45-day rule permits MSMEs to invest in the latest equipment, recruit new talent, and highlight more on development and research.
Legal backing empowers the MSME’s position in mediation, ensuring respect and just treatment from larger companies. This leverage can result in improved contract terms and conditions.
Constantly getting payments will boost MSME’s credit profile, making it convenient to garner loans with favourable terms in the future. This improved creditworthiness cultivates trust with investors and financial institutions.
Ramifications on GST Component if Sum Payable to MSE is refused
When ascertaining the tax implications of the due amount to a Micro or Small Enterprise (MSE) that comprises GST, it is essential to distinguish based on whether the GST amount is asserted as Input Tax Credit (ITC). The implications work out in the following way:
Situation Significance on GST Component
GST Asserted as Input Tax Credit (ITC): The non-deductible component of the payment (according to Section 43B (h)) relates only to the amount barring GST. The GST part is treated distinctly and identified as an ITC in the financial records.
GST Not Asserted as ITC: If the buyer does not claim the GST sum as an ITC – instead, listing it in the Profit and Loss account – the reduction of the GST component will be based on whether the conditions u/S 43B (h) are satisfied for the whole payment, including the GST.
GST as Input Tax Credit
Condition: The undertaking claims the GST reimbursed on purchases from an MSE as an Input Tax Credit.
Connotation: For the objectives of income tax rebates under Section 43B (h), solely the base amount (excepting GST) is taken into account. If this base payment to the MSE extends beyond the recommended timelines, only this part is disallowed as a subtraction until paid.
Example: If Rs. 1,40,000 is due to an MSE, comprising Rs. 40,000 as GST, and this GST is asserted as ITC, then the disapproval under Section 43B (h) pertains to Rs. 1,00,000 (base amount) if not paid within the specified time.
GST Not Asserted as Input Tax Credit
Condition: The undertaking does not claim the GST amount as an ITC, reporting the complete amount (including GST) as a cost.
Implication: The whole amount, including GST, is governed by Section 43B (h) conditions. If the remittance (including GST) is not done within the recommended timelines, the whole amount is denied as a deduction until paid.
Example: If Rs. 1 60,000 is due to an MSE, including Rs. 40,000 as GST, and this GST is not claimed as ITC but listed as an expense, then the denial under Section 43B (h) pertains to the whole Rs. 1 60,000 if not paid within the suggested time.
Wrapping Up
In short, section 43B (h) within the Financial Act of 2023 moved another mile toward offering its benefits to Micro and Small Enterprises (MSEs) by providing that payment due to those enterprises must be made within 45 days of the bill being raised. The Act shall provide much-needed relief from working capital shortage for MSEs, improve their bargaining power, and minimize disputes related to payments. For more significant undertakings, following this rule implies better tax planning and promoting a more transparent and compliant business environment. Register your MSME through us today! Ensure your business can leverage all the advantages of the new Section 43B (h) rule by registering your MSME through kanakkupillai. Complete your Udyam Registration efficiently and smoothly.
