MSME 45-Day Payment Rule Effective from 1st April 2024: What You Need to Know

Starting from April 1, 2024, the MSME 45 days payment rule is in effect. This rule is part of the MSME new rules and aims to ensure timely payments to Micro, Small, and Medium Enterprises (MSMEs). 

If there's a written agreement, payments must be made within 45 days. If there isn't a written agreement, payments must be made within 15 days. This change helps improve cash flow for MSMEs, making their operations smoother and more reliable

Continue reading this article to learn how this provision works and compare it with prior payment practices.

What is the MSME 45-Day Payment Rule?

The Income Tax Act's Section 43B(h) sets out the MSME 45 Days Payment Rule. This mandates that firms pay micro, small, and medium enterprises (MSMEs) within a prescribed time frame; under this notification, which proposes clearing bills within forty-five days, as per the MSME payment within 45 days notification, financial pressure will be reduced on them.

Payment shall be made within 45 days of receipt of goods or services under a written agreement. In its absence, fifteen days are allowed to make payment. This ensures timely payments to MSMEs, thus helping them maintain their financial health.

By making sure there are MSME payment rules, the government expects more efficiency in doing business and reliability in payment systems developed, benefiting both parties involved, i.e., vendors and clients themselves.

Provision Under MSME Section 43B(h)

Here’s a simple breakdown of MSME Section 43B(h):

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006,

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

To put it simply – if you owe money to an MSME vendor then you can claim tax deduction on this payment only when paid within 45 days as stated u/s 15 of MSMED Act’2006 effective from April 1st ,2024 i.e., AY 2024-25 & FY23-24 .

Comparison with Previous Payment Practices

By ensuring timely payments, the new rule promises a more stable and predictable business environment, essential for the growth and success of small businesses.

Vendor Registration Requirements Under MSME Rules

For the MSME rules to apply, the vendor shall be registered under the Indian MSME sector. This registration is done through the UDYAM process. Vendors who have obtained UDYAM registration are recognized as suppliers under the MSMED Act. 

Without this registration, they do not qualify for the benefits provided by the income tax laws regarding MSMEs. Therefore, when dealing with vendors, it is crucial to ensure they have the proper UDYAM registration to be considered for these benefits.

Inclusion of Traders in the 45-Day Payment Rule

The 45-day payment guideline is mainly applicable to MSMEs that are engaged in manufacturing or service provision. According to a memorandum issued by the Central Government on 2nd July 2021, retail and wholesale traders were allowed MSME registration specifically to access Priority Sector Lending (PSL) benefits. 

However, they do not qualify for other benefits, including the provisions related to delayed payments under the MSMED Act. If a vendor’s UDYAM certificate indicates they are traders, they are not regarded as suppliers for this rule. 

Treatment of GST Portion Under Section 43B(h)

The GST portion is treated differently under Section 43B(h). GST, being an indirect tax, is typically claimed as a credit by the recipient and is not recorded as an expense in the Profit and Loss account. 

As a result, when disallowing expenses under this section, the amount considered does not include the GST portion. This means that only the non-GST part of the payment is subject to the 45-day rule for disallowance. Complying with the MSME rules and accurately reporting finances require an understanding of this distinction.

Handling Outstanding Payments at Year-End

If on March 31, 2024, an amount due still remains to be paid but falls within the time prescribed under the MSMED Act, and the same is paid in the next financial year, i.e., 2024-25, but after the period prescribed under MSMED Act, then it shall not be allowed as deduction while computing business income for AY 2023-24.

This implies that the deduction of this expense can only be claimed in the year of its actual payment, i.e., FY 2024-25. This is important for businesses to understand so that they can manage their cash flows accordingly and also ensure compliance with MSME 45 days payment rule.

Payment Timing Within the Same Financial Year

For example, if goods have been purchased on April 1, 2023, and payment has been made on March 31, 2024, then such type of expenses won't come under section 43B(h). Even though payment was made after the time limit prescribed u/s.15 MSMED Act; it will not be disallowed because it was settled during the same financial year and was not outstanding at year-end.

This means that there is no bar for disallowance if payments are cleared off within the same financial year, which makes it easier for businesses to control them.

Importance of Timely Payments and MSME Loan for Startups

Startups should know about MSMEs' rules regarding payment being made within 45 days from the supply date, and so should small-scale industries. On-time payments help maintain good relationships with vendors while ensuring that expenses are deductible in the right fiscal period.

MSME loan for startups can support them to overcome these timing mismatches in their cash flow since managing working capital requirements could be a challenge for startups. Therefore, compliance with these terms not only improves financial health but also results in tax benefits that may otherwise go wasted by startups.

How Does the MSME Samadhan Portal Simplify Application Filing Under MSEFC?

The Ministry of MSME, Government of India, has introduced the MSME Samadhan Portal to make it easier for small businesses to file applications under the Micro and Small Enterprises Facilitation Council (MSEFC). This initiative is designed to help MSMEs resolve payment-related disputes quickly and efficiently.

Using the Samadhan Portal MSME, small business owners can file their applications online, track the status of their complaints, and receive timely updates. The portal aims to provide a transparent and streamlined process for addressing delayed payments, ensuring that MSMEs can focus on growing their businesses without worrying about payment issues.

Final Thoughts 

Preparing for the MSME 45-Day Payment Rule might need some changes, but it will help you have better relationships with your suppliers and smoother financial operations. A virtual CFO can be very helpful here. They can guide you through these changes, making sure you follow the rules and improve your financial processes.

Need more help? Contact CFO Bridge. We offer virtual CFO services that can help you follow the new rules and improve your business operations. Don't wait—start improving your financial management today!