Quick Reads
- Delayed payments can disrupt MSME cash flow and day-to-day operations.
- Late payments may affect buyers’ tax deductions and increase their financial liability.
- Wholesale and retail traders under specified NIC codes are excluded from delayed-payment protection.
- Eligible micro and small enterprises can use MSME Samadhaan to seek relief for delayed payments.
A single unpaid invoice can cause problems for a small business, including delays in paying staff, purchasing products, and cash flow issues. To counteract this issue, the government has implemented Section 43B(h), which enables businesses to claim tax deductions based on their timely payments to eligible micro and small enterprises. So what does this mean for you as a buyer, and how can you stop these issues from happening to your business?
What is the MSME 45-Day Payment Rule?
Payment terms for MSMEs (Micro & Small Enterprises) have been defined under Section 15 of the MSMED Act, 2006. The buyer has to pay the amounts due to the micro and small enterprise within the stipulated time as mentioned in the written agreement, but not exceeding 45 days from the date of acceptance or deemed acceptance.
- If there is no written agreement, the payment has to be made within 15 days.
- If there is any written agreement, then the payment should be made within the time mentioned in the agreement, which can’t exceed more than 45 days.
*This is the maximum period allowed for paying the amount due to the Micro & Small Enterprise.*
What is Section 43B(h) of the Income Tax Act?
Section 43B(h) of the Income Tax Act states that if payments are not made on time to an eligible Micro or Small Enterprise (MSE), then it can only be claimed as a deduction in the financial year in which the payment has been made.
This section is different from other payments under section 43B, as you cannot claim the deduction if the buyer pays off the amount owed prior to submitting the tax return.
If a payment is due in January but was paid in April, the buyer will only be able to claim it as a deduction in the financial year the payment was made in April. Section 43B(h) came into effect on 1 April 2024.
Who Does Section 43B(h) Apply to?
Section 43B(h) shall apply to any business purchasing goods or services from an eligible MSE, including companies, LLPs, Partnership Firms and Proprietorships claiming such expense.
The supplier will have to fall under the definition of micro or small enterprise as per the MSMED Act. Medium Enterprises will not qualify. Additionally, it is prudent to ensure that the supplier is registered under Udyam and the nature of their business qualifies, as even if registered under Udyam, not all enterprises are entitled to the benefit of delayed payment. The Ministry of MSME specifically excludes wholesale and retail trade activities (under NIC Codes 45, 46 and 47).
What Happens if a Business Delays MSME Payments?
Late payment may lead to:
1. Disallowance of deduction: The amount cannot be claimed as a deduction by the purchaser in the year in which it is incurred. It will be allowed as a deduction in the year of actual payment.
2. Late payment interest: If the purchaser delays the payment, they shall be liable to pay compound interest at three times the bank rate notified by RBI with monthly rests under section 16 of the MSMED Act. This interest will be payable from the appointed day or the next working day after the due date of payment, whichever is applicable.
*This is applicable irrespective of any agreement between the purchaser and the supplier.*
Conclusion
The 45-day MSME rule means that paying your vendors on time is very important. You should always check if your suppliers are eligible, have clear terms in place and keep track of what is owed to ensure that you do not incur any disallowance of tax or additional interest. It can also help small businesses manage their day-to-day costs and plan for growth.
At Lendingkart, we understand that having a shortage in your cash flow can affect your ability to pay your suppliers and run your business. We provide eligible MSMEs with collateral-free business loans with a simple digital process and less paperwork. These loans are up to ₹50 lakhs. Having access to the right working capital can help you get the short-term cash you need to keep your business running smoothly.
Frequently Asked Questions (FAQs)
1. What is a 45-day MSME payment?
Suppliers who are eligible micro and small enterprises are required to be paid within 15 days where no written agreement has been put in place or in line with the agreed payment period (up to 45 days).
2. What does Section 43B(h) of the Income Tax Act mean?
Buyers can only include expenses payable to an eligible micro and small enterprise as a tax deduction if they are paid in line with the payment timelines outlined in the MSMED Act. If they are paid late, then they can only be claimed in the year they were actually paid.
3. Does the 45-day rule apply to medium enterprises?
No. The late payment provisions in the MSMED Act and Section 43B(h) only apply to eligible micro and small enterprises.
4. What is the interest charged for late payments to MSMEs?
According to Section 16 of the MSMED Act, interest will be charged at 3 times the bank rate notified by the RBI. This will be compound interest with monthly rests.
5. Does Section 43B(h) apply to traders?
No, according to guidance issued by the Ministry, MSME trading activities (NIC codes 45, 46 & 47) are excluded from the late payment provisions. It is important that buyers check that the activity carried out by the supplier is eligible. A Udyam registration does not guarantee eligibility.
