The Impact of MSME 45-Day Payment Rule on Businesses

Introduction 

Starting a business requires buying goods and services from several suppliers. A majority part of this supply chain system includes Micro, Small, and Medium Enterprises. However, these enterprises depend on timely payments, which are considered the backbone of the business ecosystem. But delayed payment has been a persistent issue to be addressed by MSMEs. In this context, the Indian Government has introduced the 45 days payment rule under section 43B(h) of the Finance Act 2023, with effect from 1st April 2024.

The implementation of the msme 45 days payment rule is set to change the way businesses effectively handle cash flow, ensure tax compliance, and build healthier relationships across various industries. MSME payment terms are more than any legal obligation and aims to ensure timely cash flow for MSMEs.

In this blog, let us explore MSME 45 days payment rule, their benefits, working process, compliance tips, and the overall impact on business.

What is the MSME 45-day payment rule?

The MSME 45-day payment rule states that buyers need to make payments to concerned MSMEs within a specific time frame. Adhering to this rule, buyers can claim the expenses as a deduction while filing taxes. 

If an organization purchases goods/services from an MSME and fails to make the payment within 45 days or the agreed upon timeframe (whichever is earlier), then it is not possible to claim that expense as a deduction in the same financial year.

Ultimately, the main goal of msme rule for payment is to safeguard against liquidity crises in MSMEs and strengthen their supply chain processes.

Time duration for MSMEs payment 

The deadline for payment to MSMEs depends on whether there is any written agreement between the MSME sellers and buyers.

• No Agreement– Payment should be made within 15 days of purchase.
• With Agreement– Payment should be made within 45 days of purchase or the agreed date

In this relation, Section 43B(h) of the Income Tax Act, 1961, supports this rule by connecting it to timely payments to MSMEs, making them eligible for income tax deductions, thereby making compliance mandatory for the buyers.

When MSME 45-day payment is applicable 

The MSME 45-day payment rule is applicable-

• When the seller is registered under the MSME Act, 2006
• When goods/services are purchased from MSMEs
• When the buyer is an entity, subjected to tax audit

Non-registered vendors. are exempted from this rule

Impact of MSME 45-day Payment Rule on Businesses

1. Accounting burden

Businesses should understand and recognize MSME vendors, track invoice dates, adhere to payment deadlines, and maintain documentation for tax purposes. Failing may lead to the disallowance of expenses and increase the taxable income.

2. Improved Relationship with Vendors 

Considering the positive side of this rule, on-time payments-

• Enhances negotiation capability
• Improves long-term relationships and develops trust with MSME suppliers
• Guarantees uninterrupted cash flow

3. Impacts on Cash Flow Management

Organizations that earlier followed the system extended credit system up to 90 days, now must arrange the funds within 45 days.

This strict adherence to timely payment lead to-

• Improved financial discipline
• More dependency on short-term financing
• Reduced flexibility on working capital

4. Penalty Implications 

In case of delayed payments-

• Interest incurred is three times higher than the RBI bank rates
• Interest paid is not applicable under tax deduction

Thus, delayed payment is expensive when dealing with the MSME sector.

Challenges Associated with MSME 45-day Payment Rule

The MSME 45-day payment rule comes with certain challenges associated with it.

• Many vendors and MSME sellers are unaware of their rules and regulations.
• Resolving any sort of disputes concerning delayed payments or any sort of discrepancies can be resource-intensive and time-consuming, thereby hindering business operations.
• Strict payment timelines affect MSMEs and vendor relationships and might affect future collaborations as well.

These challenges can be easily mitigated by taking appropriate planning and automation measures.

Advantages of MSME Payment Rule 

• MSMEs receive timely payments, thereby improving their cash flow.
• This rule promotes and strengthens MSMEs growth, drives job opportunities, transparent business practices, and contributes to overall economic growth.
• Enables smoother business operations due to reduced delayed payments.

Tips for Implementing MSME Payment Rule

1. Identify the vendors registered as MSMEs
2. Ensure that contracts are aligned properly with the legal time frames
3. Make sure to automate payment schedules
4. Ensure the vendors understand the impact of late payment on taxation
5. Integrate with any insurance agencies to handle unforeseen expenses

Final thoughts

The MSME 45-day payment rule is a crucial step to achieve financially healthy companies in India. And, it also represents a significant game-changer to the MSME sector. While there are challenges associated with the 45-day payment rule, such as cash flow pressure to the buyers and increased compliance, there are also several benefits. It strengthens the MSME ecosystem, makes the business growth framework transparent, builds market reputation, improves operational efficiency, maintains tax benefits, and promotes financial discipline.

Therefore, by adhering to timelines and supporting MSMEs, we can create a robust and thriving business landscape in India. However, timely payments to MSMEs are just no longer optional, they are essential.