MSMEs in India worry that this rule is likely to affect working relations with suppliers and buyers

NEW DELHI : As India’s small businesses continue to grapple with debt and delayed payment issues, the Union Finance Ministry is reportedly considering a deferment of the enforcement of Rule 43B (h) under the Income Tax Act, which mandates payments to micro, small, and medium enterprises (MSMEs) within 45 days. 

The media reports indicate that the proposed postponement is likely to extend for an entire financial year, with the rule expected to come into effect from 1 April 2025.

The amendment to the Income Tax Act was introduced through the Finance Act of 2023, incorporating clause (h) in Section 43B to ensure timely payments to MSMEs. This amendment imposed a 45-day deadline for the assessee to fulfill payments. Failure to comply with this timeline would result in pending payments being treated as income and subjected to taxation.

However, the concern arises from several factors. Certain MSMEs, particularly those in the textile industry, fear that the implementation of this new rule could affect their relationships with suppliers and buyers, who frequently operate on a credit basis with these small enterprises. Additionally, others express apprehension that their existing systems may not be adequately prepared to accommodate this provision.

“There could be challenges in implementation and it can be solved through consultations, convenings and improvisation over a period basis the feedback once the implementation starts,” said Ketul Acharya, President, Global Alliance for Mass Entrepreneurship (Game).

The rule mandates MSMEs to establish robust internal systems to track invoices and ensure timely payments, a process that could be time-consuming and costly, especially for smaller enterprises. 

“Despite these challenges, I believe that there is a potential to turn around the odds and streamline delayed payment issues. Phased implementation of the rule, giving businesses time to adapt, could smooth the transition and minimise disruptions. Leveraging technology to simplify compliance and streamline payment processes could also alleviate the burden, Acharya added.

Industry bodies, in their proposals to the finance ministry, have suggested potential modifications to the act or a temporary postponement to allow businesses time to adjust. Recently, the Confederation of All India Traders (CAIT), to address concerns regarding Income Tax Law 43(B)H among traders, talked to Finance Minister Smt Nirmala Sitharaman. 

Praveen Khandelwal, Secretary General, CAIT emphasised the need for greater awareness among traders about this beneficial provision and proposed a one-year postponement of its implementation. This delay, he argued, would allow traders ample time to understand and comply with the law smoothly.

Given the lack of clarity surrounding the applicability of the law to traders and other related provisions, CAIT called for the suspension of its implementation until sufficient clarification and information dissemination are achieved nationwide.

Several industry leaders have said that the enforcement of the 45-day payment rule marks a very positive stride for MSMEs, particularly for micro and small enterprises, amid India’s prevalent issue of delayed payments. Legally, delayed payments occur when buyers extend payment timelines to MSE suppliers beyond 45 days. 

According to a report by the GAME, delayed payments have surged to unprecedented levels, amounting to 10.7 lakh crore, approximately 7.8 per cent of the GDP. Effective implementation of the rule holds the potential to significantly ameliorate the cash flow challenges faced by MSMEs, empowering them to invest, expand, and make greater contributions to the economy. Moreover, enhanced clarity and stringent enforcement can foster transparency and accountability in business transactions, fostering a fairer marketplace.

“MSMEs face mounting challenges due to delayed payments from both public and private entities, which have far-reaching consequences throughout the MSME ecosystem. Small businesses, often operating on narrow profit margins, find their cash flow interrupted and operational capacities hindered by these payment delays. While the income tax amendment targets this issue, it also applies to all buyer companies, many of whom may be MSMEs struggling to receive payments from their customers. Both large and small buyers grapple with their own receivables collection, contributing to delayed payments to MSME vendors,” said Shrinivas Kasar, Co-founder, Cashinvoice.

According to the experts, technology can also play a pivotal role in optimising payment processes and ensuring adherence to regulations. Automated invoice tracking, online dispute resolution mechanisms, and digital payment platforms offer efficient avenues for compliance and resolution.

 “While there may be initial adjustments as businesses adapt to stricter timelines, I believe a collaborative approach can bridge any gaps. By working together, we can ensure a smooth transition and unlock the full potential of this empowering policy. Timely payments will empower MSMEs to invest, innovate, and create jobs, ultimately contributing to a more robust and inclusive Indian marketplace,” said Amit Garg, Partner, Protium.