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MSMEs protest 45-day payment rule, file appeal in apex court: Report

New Delhi, May 3, 2024 

Small businesses say new orders from larger clients have declined after new regulation on timely payment 

To ensure timely payments to micro, small and medium enterprises (MSMEs), a new regulation was implemented on April 1. It requires companies to settle their dues to MSMEs within 45 days. Non-compliance will lead to a tax liability on the overdue amount.

More than 40,000 small businesses, including 12,000 in Gujarat, have cancelled their registration and approached the Supreme Court with an appeal to remove the regulation, according to a report by CNBC Awaaz. Since the regulation’s implementation, numerous small businesses have reported a decline in new orders from larger clients, said the TV news channel.

Under Section 43B(h) of the Income Tax Act 1961, buyers purchasing goods from any of the 36 MSMEs are required to settle the outstanding amount 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 says that 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.

What it does

The section disallows businesses from claiming deductions for expenses incurred towards goods or services purchased from MSMEs if the payment is delayed beyond a specific timeframe. In simpler terms, if you don't pay an MSME on time, you can't deduct that expense from your taxable income, potentially increasing your tax liability.

In India, businesses typically record expenses as they occur (accrual basis), regardless of whether the payment has been made. However, Section 15 of the MSMED Act, 2006, alongside the newly introduced Section 43B(h) of the Income Tax Act, mandates that businesses must settle their dues with MSME Registered Enterprises within 15 days, or up to 45 days under a mutual agreement.

From April 1, 2024, companies, sole proprietorships, partnerships and LLPs are required to pay their suppliers registered as MSMEs within 15 days, or up to 45 days under an agreement.

Confederation of All India Traders, which represents small businesses, has appealed to Finance Minister Nirmala Sitharaman for a deferral of the clause in the Income Tax Act related to MSME payments until April 2025.

[The Business Standard]

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