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.

For example, a small business specializing in handmade ceramics sells its products to a large retail chain. As per the common industry practice, the larger company typically takes about 90 to 120 days to settle its invoices with the small business.

Since April 1, 2024, the ceramics business is required to settle its dues with the larger retail company within 45 days from the invoice date. If the small pottery business issues an invoice to the larger business on April 10, then the buyer should pay the seller on or before May 25. In case the larger company delays its payment beyond this period, it faces a tax liability on the overdue amount in the current financial year. This will ideally increase the company's costs.

For example, a small ceramics business sells its products to a large retail chain. As per common industry practice, the retail chain typically takes about 90 to 120 days to settle its invoices with the smaller business.

Since April 1, 2024, the retail chain is required to settle its dues with the ceramics business within 45 days from the invoice date. So, if the small ceramics business issues an invoice to the retail chain on April 10, they should pay the invoice on or before May 25. If the retail chain delays its payment beyond this period, it faces a tax liability on the overdue amount in the current financial year. This will likely increase the company's costs.

What is an MSME?

MSME is an acronym for Micro, Small and Medium Enterprises and is broadly categorized into two different divisions. One is the manufacturing division, which manufactures goods for any industry, and the other one is the service enterprise engaged in delivering services. Based on the income that each enterprise earns, they are classified as the following:

When is the MSME 45-day payment rule under Section 43B(h) applicable?

The MSME new rules for payment under the Section 43B(h) is applicable since April 1, 2024. It is also applicable when a business buys goods or services from another business registered under the MSMED Act, 2006. It is important to note that the buyer does not have to be registered under the MSMED Act, 2006 for this rule to be applicable.

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.

How to use Zoho Books and stay compliant with the 45-day MSME payment rule

If your business is MSME registered, you can add your organization’s MSME details in Zoho Books and include your MSME number to your organization’s address, since it is mandatory to have your MSME number on the invoices. Apart from this, you can also update MSME details for your vendors and check unpaid bills from them. Here are some of the advantages of using Zoho Books to comply with this new rule:

• Ensure smooth financial operations and comply with section 43B(h) of the Finance Act, 2023, protecting yourself from penalties.

• Keep your records accurate and up to date to manage vendor relationships smoothly and adhere to payment terms mandated by MSME laws.

• Streamline the onboarding process for new vendors, ensuring compliance from the start, and fostering strong and legally-sound business relationships.

• Get a clear overview of outstanding payments to MSME vendors, prioritize payments, maintain good relationships, and avoid penalties for payment delays.

We hope this guide has helped you understand the intricacies of the MSME 45-day payment rule under Section 43B(h). If you're looking for more details on MSME settings for your  business, read our help document here.

If you're a big company frequently buying from small businesses, we encourage you to review your payment practices to ensure compliance and support the growth of MSMEs. You can foster better business relationships and enhance your company's financial health by staying informed and by adhering to these regulations.