What is the MSME 45-day payment rule?

The Finance Act, 2023 included the MSME 45-day payment rule under the Section 43B(h) and has been in effect since April 1, 2024. If companies do not pay MSMEs within 45 days or as per the date on their agreement for the goods or services they bought, they can’t deduct that expense from their taxable income the year it occurred. The companies can claim it only in the year they pay it, leading them to pay more taxes than intended.

This new MSME 45-day rule aims to solve the capital issue in the MSME sector by ensuring timely payments.It will be applied to the 2024–2025 assessment year and future years.

What is the time limit to make a payment?
The time limit depends on the agreement between the buyer and seller. If a written agreement exists, then the buyer has to pay within the agreed date or within 45 days from the purchase date, whichever is sooner. If there is no agreement between the buyer and the MSME seller, the buyer must make the payment within 15 days.

Penalty for non-compliance of the new MSME payment rule 43B(h)
If the buyer fails to pay an MSME on time, they will be charged compound interest that is three times higher than the bank rate and the interest will start on the agreed payment date or the day after the 15-day period. The most important point to note is that businesses are not allowed to write off this interest as an expense, per the Income Tax Act (ITA) of 1961.

What are the advantages of the 45-day payment rule for MSMEs?

Based on whether the large company has an agreement or not, they should pay the smaller companies within 15 or 45 days. This ensures timely cash flow for MSMEs and helps the company’s growth and sustainability.
It reduces financial stress for MSMEs and helps them plan their finances better and maintain a balanced budget without having to borrow short-term, high-interest loans.
The new 45-day payment rule under section 43b(h) allows MSMEs to hire new talent, invest in the latest equipment, and focus more on research and development.
Legal support empowers the MSME’s position in negotiations, ensuring fair treatment and respect from bigger companies. This leverage can lead to better contract terms and conditions.
Receiving payments consistently will improve MSME’s credit profile, making it easier to secure loans with favorable terms in the future. This enhanced creditworthiness builds trust with financial institutions and investors.

How do large companies benefit from the new MSME 45-day payment rule?

Paying expenses within 45 days helps large companies claim these expenses in their tax deductions. This compliance optimizes tax liabilities and prevents tax authorities from disallowing expenses.
Timely payments boost the company’s market reputation and build strong, trust-based relationships with suppliers. This positive image can lead to increased brand loyalty and better business opportunities.
Reliable payments ensure a steady supply of goods and services, reducing supply chain disruptions. This stability fosters long-term partnerships with dependable suppliers.
Following the 45-day payment rule helps avoid potential disputes and penalties, ensuring legal compliance.
When payment processes are streamlined, it improves internal efficiency and reduces administrative hassle. These efficient processes improve financial management and reporting, in turn, increasing organizational performance.
Following the MSME 45-day payment rule aligns with CSR objectives, showing a commitment to community support.