Budget 2024: Centre May Relax Payment Rule for MSMEs

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The government is considering relaxing the mandatory requirement for large corporations to pay Micro, Small, and Medium Enterprises (MSMEs) within 45 days of purchasing goods and services. This change aims to prevent large corporations from seeking alternative sourcing avenues. According to sources from the Press Trust of India (PTI), an official announcement regarding this matter is expected during the Budget presentation on July 23.

Finance Minister Nirmala Sitharaman noted that any changes to this rule would have to be implemented in the full Budget under the new government, following representations submitted by MSMEs. The expected changes involve Section 43B(H) of the Income Tax Act, which was added in last year’s Budget to address delayed payments to MSMEs.

Under the current Section 43B(h) of the Income Tax Act, introduced through the Finance Act 2023, if a larger company fails to pay an MSME on time—within 45 days in the case of written agreements—the company cannot deduct that expense from its taxable income, potentially resulting in higher taxes. This provision was intended to ensure timely payments to MSMEs.

However, MSMEs have expressed concerns that this rule might lead large buyers to bypass registered MSME suppliers, opting instead for non-registered MSMEs or non-MSME entities. The fear is that large corporations may pressure their vendors to relinquish their MSME registration to continue business relationships, thereby undermining the purpose of the amendment.

During pre-budget deliberations, the government has been considering suggestions from MSMEs about changes to Section 43B(H) of the Income Tax Act. Finance Minister Nirmala Sitharaman stated in May that any rule changes would need to be addressed in the full Budget scheduled for July.

The MSME sector is crucial to the Indian economy, contributing 30% to the country’s gross domestic product (GDP) and serving as the second-largest employer after agriculture. Exports from MSMEs account for 45.56% of the country’s total exports.

(With PTI inputs)

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