The Finance Ministry is currently exploring possible adjustments to the new income tax rule that mandates business enterprises to make payments to micro, small, and medium enterprises (MSMEs) within 45 days. This move comes as businesses express concerns and request amendments to the provision, which is scheduled to come into effect on April 1, 2024.
According to sources familiar with the matter, the Department of Revenue is reviewing proposals seeking a deferment of the provision by a full financial year or an extension of the 45-day time limit. Many businesses are urging for the implementation date to be pushed to April 1, 2025.
The apprehensions arise from various issues. Certain segments of MSMEs, particularly those in industries like textiles, fear that the rule could strain their relationships with suppliers and buyers accustomed to credit systems with small businesses. Additionally, some businesses highlight concerns about the readiness of their systems to comply with this new provision.
In an effort to encourage timely payments to micro and small enterprises, the Finance Act 2023 introduced a new clause in the Income Tax Act. This clause stipulates that any sum payable by the assessee to a micro or small enterprise beyond the specified time limit of 45 days outlined in the MSME Development Act 2006 will only be eligible as a deduction upon actual payment. Failure to make the payment within the stipulated time will result in the buyer being liable for tax on the outstanding amount.
The Confederation of All India Traders (CAIT) has also voiced concerns and written to Finance Minister Nirmala Sitharaman, urging a suspension of the provision’s implementation until nationwide clarification and information dissemination are achieved. CAIT has appealed for a one-year deferral period, pushing the implementation from April 1, 2024, to April 1, 2025, to allow traders to adapt to the changes without negatively impacting micro and small enterprises.
