The 45-day rule for the MSME businesses has been in an imbroglio since it came into effect. This has happened to such an extent that the associations have moved the Supreme Court, urging its interference.
However, the apex court rejected the plea, filed by Federation of All India Vyapar Mandal, and allowed them to approach the high court.
Amidst this, the Union MSME Ministry is also learnt to have reached out to industry players for solutions.
As per the reports, the ministry has asked stakeholders to suggest ways to resolve the issues arising from the I-T Act and to recommend possible alternate mechanisms for timely clearance of MSME bills.
What is MSME 45-day rule?
The government has introduced a new clause in Section 43B of the I-T Act that aimed to secure timely payments for smaller units.
Clause (h) in Section 43B allowed for deduction for larger companies against payments done to MSMEs only after they were actually paid. If not, the larger companies were otherwise not allowed to make deductions in their tax returns, resulting in the prospect of increased tax liability.
This amendment (Clause (h) in Section 43B) aims to address the issue of working capital scarcity in the MSME industry and promote prompt payments to micro and small businesses.
Any sum payable by the assessee to a Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed).
What is the issue?
A peculiar problem that has arised of the new clause is that since the balance sheets are audited in the assessment year 2024-25 for transactions in financial year 2023-24, the bigger companies started flagging concerns about ballooning tax liability.
Many MSME owners too reported cancellation of orders due to the new tax clause.
Further, the MSMEs also pointed that the big companies are shifting business to unregistered MSMEs, as it lends them the flexibility to not meet the mandatory provision.
What experts say?
Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME) said a considerable time was given to the stakeholders to adjust to the new tax provision and issues surfaced only when balance sheets were finalised.
“A full year was given to people to prepare. It did not come in this year’s budget, but last year’s budget. Everybody knew it was going to kick in from April 1. Large corporations will face problems, they usually ask for 180 days (payment cycle), they have enough money, let them pay in time, what is the issue,” he said.
He believed that the new clause is not detrimental to MSMEs, rather it will instil discipline into commercial practices.
Karan Desai, Founder, Interface Ventures, said the possibility of this rule is a big obstacle for purchasers since it may have a substantial effect on their cash flow, particularly if it is enacted suddenly. As a result, they have asked for more time to make adjustments.
“However, sellers see this regulation favorably and are aware of its possible advantages. Longer credit durations used to be the driving force behind their long-term relationships, but they now had to tread carefully,” he added.
“These 45-day requirements have an impact on SMEs’ financial architecture that extends beyond simple compliance.”
Roshan Shah, Co-Founder and Chief Executive Officer of VoloFin said, “In the intricate tapestry of global commerce, the 45-day payment rule stands as a linchpin, delicately balancing the financial stability of buyers with the operational resilience of suppliers.”
“While buyers enjoy optimized cash flow and resource allocation, small MSMEs find themselves walking a tightrope, navigating between innovation and survival amidst delayed payments.”
