MSME Payment Rule: Everything You Need to Know About It

In effect from April, the Income Tax Department has ruled that businesses can’t apply for tax deductions for payments made beyond 45 days to the MSMEs against goods and services.

What The New MSME Payment Rule Has Changed?

According to the regulations, if a non-MSME or larger company does not pay an MSME under 45 days from the date of purchase as per a written agreement, the company cannot show or deduct the expense from its taxable income.

Before the implementation of the new rule, some industry groups requested the government to delay the decision. However, the Federation of Indian Micro and Small & Medium Enterprises (FISME) stated that this new payment rule may bring a revolutionary change for the MSMEs. But are concerned that the large companies may switch to unregistered MSMEs for the supplies.

Objectives of the MSME Payment Rule

Primarily the new MSME payment rule is modeled to support MSMEs by ensuring the financial inclusivity for growth and development. By regulating prompt payments to MSMEs from larger companies, the Government is assisting in sustaining a regular cash flow essential for operational efficiency and business expansion, ultimately participating in the country's economic welfare.

Key Elements of MSME Payment Rule

• Predetermined Payment Timeline: This payment rule enforces a fixed credit period within which the business has to settle its debts to MSME.
• Repercussions For Non-Compliance: The government has ruled strict actions against the larger companies failing to comply and make payments within a fixed timeline. Penalties, higher interest rates, and many other measures have been introduced for non-compliers.
• Effective Grievance Management System: It helps MSMEs to seek Government help raising disputes, in case any large company defaults and fails to comply with the rules.
• Training Programs and Awareness Seminars: Educating MSMEs about their Government programs and policies designed for their growth and development.

Major Benefits of MSME Payment Rule

Timely Payments

With the new payment rule in effect, large companies are obligated to clear due within a predetermined 45 days, helping MSMEs by enhancing the cash flow necessary for their operations and sustaining financial performance. Moreover, timely payments will also reduce their daily financial issues and help them to manage expenses efficiently.

Improved Financial Health

Regular payment will improve cash flow and reduce the dependency on debt if any, improving the financial health of MSMEs. Moreover, the additional funds can be reinvested into existing projects or new business opportunities. Also, these enterprises may focus on expanding business or investing in new technology for improved productivity.

Enhanced Business Relationships

Timely payments are the solution to many problems for a business, due to which the relations of many companies get damaged. Implementing the new rule will foster trust and understanding between MSMEs and large companies. Now, MSMEs work with more encouragement towards long-term collaborations and contracts, knowing that the payments will be released on time.

Reduced Dependency on Loans

Payments on time means the small business will no longer be required to depend on credit. This will result in lower debt, increased working capital, and profitability for MSMEs. Moreover, with regular payments in hand, they will not be required to limit their expenses required for efficient operations. A little free liquidity will assist them in acquiring the highest quality resources and equipment for improved performance.

Encouragement for Formal Registration

There is a blend of registered or unregistered MSMEs operating in the market. As per the Government, Udyam is a mandatory certificate from the government that MSMEs receive upon signing up on an official portal. It operates a central database carrying information on all MSMEs operating in India. However, some companies have not registered due to various reasons. The implementation of this rule will encourage more MSMEs to register on the portal.

Increased Competitiveness

With additional cash flow, no debts, and overall financial stability, MSMEs will focus on offering more quality, innovative products, and reliable customer services to their consumers. This will increase the competition in the market to offer the best of the best quality.

Economic Growth

Supporting MSMEs through timely payments contributes to overall economic growth. Healthy MSMEs generate employment, boost production, and drive economic activities, benefiting the larger economy.

Regulatory Compliance

The rule promotes transparency and accountability in business transactions. It ensures that larger companies comply with payment terms, leading to a more ethical business environment.