Understanding the MSME 45-Day Payment Rule

The Micro, Small, and Medium Enterprises (MSME) sector plays a crucial role in the economic growth of a country. However, delayed payments have been a persistent issue for these enterprises. To address this, the Indian government has introduced a 45-day payment rule.

The MSME Act and Section 43B(h)

The MSME Act mandates that any buyer who purchases goods or services from an MSME must make the payment within 45 days. If the buyer fails to make the payment within this period, they are required to pay interest at a rate equal to three times the bank rate notified by the Reserve Bank of India.

The Finance Act, 2023, introduced significant changes with the insertion of clause (h) in section 43B of the Income Tax Act12. This clause strengthens the enforcement of MSME payment regulations.

Section 43B(h) disallows expenses for payments not made within the specified time limit. For outstanding payments as of 31st March, if the payment is not made within the time limit, such expenses shall be disallowed under section 43B(h) from the computation of income. The allowance shall be done in the year in which the payment is made.

Applicability and Effective Date

This clause is applicable when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006, is not mandatory. The applicability of clause (h) of Section 43B is from April 1, 2024.

Payment Time Limit

Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.

Conclusion

The 45-day payment rule is a significant step towards ensuring timely payments to MSMEs and alleviating their working capital issues. It is crucial for businesses to understand these provisions to ensure compliance and avoid penalties.