SOMETIMES THE MOST helpful of things can have an unintentional fallout. Take the 45-day payment rule for MSMEs for instance. With preparation underway for the Union Budget 2024-25, finance ministry officials are trying to understand the unintended impact of the new provision under the Income Tax Act that mandates payments to micro, small and medium enterprises (MSMEs) within a 45-day time period. According to sources, some relief may be on the cards to ensure that payments are not tied up to the 45-day window.
THE INCOME TAX CHALLENGE
1 The Finance Act 2023 inserted a clause in the Income Tax Act to ensure payments within 45 days to MSMEs
2 In case of nonpayment within 45 days, buyer will have to pay tax on the amount
3 The MSME sector has sought deferment and extension of deadline to 60 or 120 days
4 Many MSMEs have faced cancellation of orders since the rule came into effect
Finance Minister Nirmala Sitharaman had-at an interaction with MSMEs in Ludhiana on May 29-said that if MSMEs do not want the 45-day payment rule, then the Centre is willing to reconsider it.
The genesis of the issue lies in the Finance Act 2023, which inserted a new clause (h) in section 43B of the Income Tax Act, under which larger enterprises must pay MSMEs within 45 days of a written agreement. Failure to do so prevents these large businesses from deducting the expense from their taxable income, potentially resulting in higher taxes. This stringent timeline has caused a significant fallout, with many small business owners cancelling their MSME registrations. The critical question now is whether this policy shift genuinely supports the underserved sector or inadvertently drives business toward larger enterprises.
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