MSME Payment Rule: A Comprehensive Overview
Section 43B(h) of the Finance Act, 2023 established the MSME 45-day payment rule, which went into force on April 1, 2024. Businesses cannot deduct that expense from their taxable income in the year that it occurred if they do not pay MSMEs for the goods or services they purchased within 45 days or on the date specified in their agreement. Companies pay more taxes than they planned since they may only claim it in the year that they pay it. By guaranteeing on-time payments, this new MSME 45-day rule seeks to address the capital problem in the MSME sector. The 2024–2025 evaluation year and subsequent years will be affected. In this article, we will explain the MSME 45-day payment rule in detail.
Table of Content
New MSME 45-Day Payment Rule under Section 43B(h)
According to the recently added clause (h), any amount owed by the assessee to a Micro & Small Business after the deadline set forth in Section 15 of the MSMED Act may only be deducted in the year prior to the actual payment of the amount (regardless of the accounting method used). When a business buys products or services from a supplier listed under the MSMED Act of 2006, Section 43B(h) is applicable. It's important to note that this section does not need the buyer to be registered under the MSMED Act. This provision, which encourages quick payment to registered micro and small firms, will take effect on April 1, 2024. As long as the supplier is registered under the MSMED Act, this guarantees that the advantages of Section 43B(h) are accessible
Illustration:
For instance, a big retail chain purchases some goods from a small company that specialises in handcrafted ceramics. The larger company usually takes between 90 and 120 days to settle its invoices with the tiny business, as is standard industry procedure. The ceramics company has been obliged since April 1, 2024, to pay the larger retail company within 45 days of the invoice date. The buyer must pay the seller by May 25 at the latest if the small ceramic business sends an invoice to the larger company on April 10. The larger business will be liable for taxes on the past-due sum in the current fiscal year if it continues to postpone payment past this point. Ideally, this will result in higher expenses for the business.
What is an MSME?
A micro enterprise is defined as an organisation with a plant and machinery investment of no more than Rs. 1 crore and a turnover of no more than Rs. 5 crores. Conversely, small businesses should invest no more than 10 crores in equipment and machinery and have a turnover of no more than 50 crores. The following table illustrates the concept in detail:
Type of enterprise | Investment | Turnover |
Micro | Rs. 1 crore | Rs. 5 crore |
Small | Rs. 10 crore | Rs. 50 crore |
Medium | Rs. 50 crore | Rs. 250 crore |
Benefits of MSME Payment Rule
Benefits for MSMEs
Easy Payment Cycle: Section 43B(h) encourages big businesses or organisations to pay MSMEs within the allotted period, which is 15 days in the absence of a formal agreement and 45 days in the presence of one. MSMEs are thus guaranteed timely cash flow, which is critical to their long-term viability and expansion.
Improved Bargaining Power: When negotiating payment conditions with larger businesses or bodies, the provision guarantees MSMEs improved bargaining power. It is feasible for them to firmly push for deadlines aligned with the stated time range since they stay certain of penalties in case of delayed payments.
Decreased Disputes: Potential disagreements and legal wrangles that could result from unpaid debts are reduced as a result of on-time payments. Consequently, both MSMEs and larger companies will save time and resources.
Benefits for Large Enterprises
Transparency and Compliance: A responsible company environment is promoted by Income-Tax Section 43B(h), which encourages open financial procedures and compliance with regulations.
Tax Planning: Larger businesses can claim deductions for payments made to MSMEs in the same year, lowering their tax obligations as long as they follow the deadlines.
Robust MSME environment: Ensuring that MSMEs receive timely payments encourages a strong MSME environment. In exchange, larger organisations gain from a thriving supply chain and convenient access to a range of resources.
Applicability of MSME Payment Rule
This provision applies when a business purchases products or services from Micro and Small Businesses that are registered under the MSMED Act of 2006. Notably, the buyer is not required to register under the MSMED Act of 2006. Section 43B's clause (h) becomes operative on April 1, 2024. Priority Sector Lending is the only reason wholesale and retail merchants are eligible for Udyam registration, according to Office Memorandum No. 5/2(2)/2021-E/P and G/Policy issued July 2, 2021. Therefore, according to the MSMED Act's definition of an enterprise, Section 43B(h) does not apply to debts owed to traders.
Effective Date and Time Limit
As of April 1, 2024, Section 43B Clause (h) is in effect. As of the assessment year (AY) 2024–2025, this amendment is in effect. According to Section 15 of the MSMED Act of 2006, business organisations are required to follow certain payment schedules to MSMEs under Section 43B(h). These terms of payment are subject to a formal contract between the supplier and the buyer.
No Written Agreement: The business organisation must pay within 15 days after buying goods or services from an MSME if there isn't a written agreement outlining the terms of payment.
With a written contract: If a written agreement exists, payments must be made within the time frame indicated in the agreement, as long as it doesn't go beyond 45 days after the products or services are accepted or presumed accepted.
The following table illustrates the applicable timelines for the MSME 45-day rule:
Sr. No. | Day of acceptance of goods or services by a buyer from a supplier | Credit period (Number of days) | Due Date according to MSME ACT
| Actual date of payment | Deduction allowed in which Financial Year |
1 | 29/03/2024 | 60 | 13/05/2024 | 25/05/2024 | FY 2024-25 |
2 | 01/04/2024 | 45 | 16/05/2024 | 21/05/2024 | FY 2024-25 |
3 | 31/01/2024 | 15 | 15/02/2024 | 20/02/2024 | FY 2023-24 |
4 | 11/09/2023 | 20 | 01/02/2023 | 03/10/2023 | FY 2023-24 |
5 | 30/11/2023 | 30 | 30/12/2023 | 20/12/2023 | FY 2023-24 |
6 | 21/04/2024 | 40 | 31/05/2024 | 20/06/2024 | FY 2024-25 |
7 | 15/12/2023 | – | 30/12/2023 | 05/04/2024 | FY 2024-25 |
8 | 10/11/2023 | – | 25/11/2023 | 30/11/2023 | FY 2023-24 |
Penalties for Failure to Pay MSMEs under the Rule
Interest is due when an MSME is paid beyond the due date.
Interest rate: Three times the bank rate announced by the Reserve Bank of India (RBI) is the compound interest rate.
Date from which interest is due: The date specified in the agreement or the day that follows right after the fifteen-day period from the day that a buyer accepts goods or services from a supplier, or the day that is regarded to be the buyer's acceptance of goods or services (appointed day), as applicable.
As per the Income-tax Act, this interest cannot be deducted as an expense.
Steps to Ensure Compliance with the MSME Payment Rule
Get in touch with suppliers to confirm if they are categorised as micro, small, or medium-sized businesses.
Examine the suppliers to determine whether they fit the requirements for micro or small businesses.
Determine which suppliers engage in manufacturing, trading, or service provision.
Verifying if supplier payments are associated with "Capex" products is crucial.
Examine any existing written agreements pertaining to the terms of payment.
Based on the date of delivery of the products or services, determine the deadline.
You should issue a cheque on or before the day of the payment due to ensure timely payment.
Verify the status of any payments made to small and medium-sized businesses in advance.
Make sure that small and medium-sized businesses are never required to pay interest.
Verify whether the Minimum Alternate Tax or the Presumptive Tax scheme applies to you.
Conclusion
According to the most recent changes, suppliers who are not registered under the MSME Act may still be subject to disallowance under Section 438(h) of the Income Tax Act. Therefore, in order for suppliers to have a comprehensive understanding of their tax duties, they need to be aware of these new revisions. In this manner, they can benefit from a compromise between the MSME Act and the Income Tax Act.
FAQ
Q1. What is the new rule for MSME payments for 2024–2025?
Customers who purchase goods from MSMEs are now required to pay them within 45 days of the date of delivery. The deadline for the final payment is March 31, 2024.
Q2. How can businesses ensure following the new rules?
By monitoring due dates, improving the billing process, and obtaining payment arrangements, businesses can ensure that they are adhering to the regulations.
Q3. What are the long-term benefits of early payments?
Making on-time payments a habit can increase trust, strengthen ties with suppliers, and advance security and economic growth overall.
Q4. Is the MSME 45-day payment rule extended?
The adjustment will take effect on April 1, 2024, and will apply to the assessment year 2024-2025 and any subsequent years.
Q5. What does Section 43B(h) cover?
Any amount owed by the assessee to a micro or small business is expressly covered by the recently inserted clause (h) in Section 43B. The purpose of the change is to guarantee that these businesses receive their payments on schedule, as required by the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006. This section covers payments beyond the deadline set by Section 15 of the MSMED Act and allows deductions only upon actual payment.
Q6. Who is affected by Section 43B(h)?
Companies that work with Micro, Small, and Medium-Sized Enterprises (MSMEs) will have to be more careful about monitoring and making sure that these companies are paid on time. Firms may have to consider modifying their accounting and tax planning strategies because deductions for late payments to MSMEs can only be claimed upon actual payment.
Q7. What is the timeframe for MSME payments under Section 43B(h)?
Companies that work with Micro, Small, and Medium-Sized Enterprises (MSMEs) will have to be more careful about monitoring and making sure that these companies are paid on time. Firms may need to modify their accounting and tax planning procedures because deductions for late payments to micro and small firms can only be claimed upon actual payment.
Q8. Can payments made later than the due date be carried forward for deduction?
According to clause (h) of Section 43B, payments that exceed the deadline set forth in Section 15 of the Micro, Small and Medium Enterprise Development (MSMED) Act of 2006 are covered and can only be deducted upon "actual payment."
Q9. What happens in case MSME is not paid within 45 days?
Companies are unable to claim deductions if they fail to pay the MSME within 45 days. In essence, businesses forfeit the opportunity to deduct such costs from their taxable revenue if payments are not made within the allotted period. As a result, the buyer must pay taxes on the amount that is past due.
Q10. Are there any penalties for non-compliance with the MSME payment rule?
The outstanding unpaid amount will be added to the taxpayer's taxable income if the payments are not made within the allotted time frame, which cannot be more than 45 days. The taxpayer has to incur the income-tax burden on the respective overdue amount. The assessee receives a deduction for payments made in the prior year. As notified by the Reserve Bank of India (RBI), a business enterprise must pay compound interest at monthly interest to the supplier at three times bank interest if it fails to make payments to Micro, Small, and Medium Enterprises (MSME) within the above-mentioned period.
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