Govt may relax 45-day payment rule for MSMEs in Budget 2024

The government may relax the requirement of making payments to MSMEs within 45 days of buying goods and services, to prevent large corporates from looking at other sourcing avenues, sources have noted. An announcement to this effect could be made in the Budget likely to be presented on July 23.

The government is considering suggestions regarding changes to Section 43B(h) of the Income Tax Act made by MSMEs during pre-budget consultations, sources said. The government, in last year's budget added a new clause under Section 43B of the Income Tax Act to address the challenge of delayed payments faced by MSMEs in the country.

According to Section 43B(h) of the Income Tax Act, introduced through the Finance Act 2023, if a larger company does not pay an MSME on time -- within 45 days in case of written agreement -- it cannot deduct that expense from its taxable income, leading to potentially higher taxes.

MSMEs fear that due to this provision, large buyers could cold-shoulder MSME suppliers and start buying either from those MSMEs that are not registered with Udyam or from non-MSMEs.

The amendment was brought in for MSMEs to get timely payment, but a lot of concerns were raised by them, sources said, adding that they feared that large corporate, in bid to safeguard their interest, can shift their sourcing requirement to bigger firms or ask their vendors to give up their MSME registration to do business with them.

Earlier in May, Finance Minister Nirmala Sitharaman had said the changes, if any, to the rule will have to be done in the full Budget in July under the new government as per the representations submitted by MSMEs.

The MSME sector accounts for 30% of the country's gross domestic product (GDP) and the second largest employer after agriculture. The share of exports from products specified for MSMEs constituted 45.56 % of the country's total exports.