Finance Minister Nirmala Sitharaman announced on Tuesday that the government will repeal the changes made to Section 43B of the Income Tax Act if MSMEs prefer to continue with uncertain payment timelines from their buyers.
While interacting with MSMEs and local industries in Ludhiana, Sitharaman explained that the 45-day payment rule was added to the Income Tax Act in 2008 at the request of MSMEs facing payment delays from their buyers. "If MSMEs prefer flexibility in payment timelines beyond the 45-day limit—whether it's 45 days, 150 days, or a year—we can revert to the original rule," Sitharaman stated.
In last year’s budget, the government proposed a new clause (h) under Section 43B of the Income Tax Act to address the issue of delayed payments hindering MSMEs' working capital and business growth. Effective April 1, 2024, the clause stipulates that expenses to buyers on invoices from micro and small enterprises are only deductible if paid within 45 days (where an agreement exists) or within 15 days if no agreement is in place, instead of the year the expense was incurred.
Sitharaman noted that any changes to the rule would need to be made in the full budget in July by the new government, based on MSME representations. "The amendment to the Income Tax Act was made at the request of MSMEs who were facing delayed payments beyond 45 days, seeking tax relief for the year the payment is made," she added.
Some MSMEs, including those in the Clothing Manufacturers Association of India (CMAI), argue that the new clause disrupts their working capital flow, as their payment cycles often exceed 45 days, sometimes extending up to six months. They believe that the rule could lead to business losses, as buyers might prefer suppliers outside the MSME category.
Additionally, traders under the Federation of All India Vyapar Mandal (FAIVM) and associations in Chennai and West Bengal have called for the repeal of the law changes. They highlight the discrepancy where they must pay MSMEs within 45 days, but have no such guarantee from their buyers, leading to working capital issues. "How can we pay MSEs on time when there is no fixed timeline for our payments from buyers?" questioned Jayendra Tanna, President of FAIVM.
Since October 2017, MSMEs have filed 1.91 lakh delayed payment applications involving Rs 43,532 crore, but only 36,593 cases involving Rs 6,287 crore have been resolved, according to data from the MSME Ministry's delayed payment monitoring portal, MSME Samadhaan.
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