Why the Budget skipped review of the 45-day payment rule for income tax

Even though micro, small, and medium enterprises (MSMEs) are a key focus area of the Union Budget 2024-25, a section of the industry was left disappointed as it did not review the 45-day payment rule, which requires buyers from these firms to pay tax on delayed payments.

According to sources, the rule remained unchanged because it is tied to the Micro, Small and Medium Enterprises Development Act, which defines a delayed payment as one that has been due for 45 days or more.

“The new income tax provision only upholds the MSME Development Act's provision, which stipulates a 45-day timeline. Companies that are late in making payments can no longer claim it as an expenditure. Instead, they must pay tax on it and can claim a refund later upon making the payment,” said a government source, adding that any change in the 45-day income tax payment provision would depend on changes to the MSME Development Act's payment timeline.

“The issue must be taken up with the MSME Ministry, which can decide whether the time period should be adjusted to a more convenient duration—60 days, 90 days, or even 120 days. The income tax rule can then be changed accordingly,” explained the source.

Additionally, another source noted that the impact of the move has now been absorbed by the MSME sector and their clients, with new payment cycles being made around the 45-day rule. “The objective of this provision is to encourage companies to pay MSMEs on time and ensure they have adequate working capital,” said a second source.

The new income tax provision, which came into effect on April 1 this year, had caused concerns among MSMEs, who feared that their buyers would stop giving them orders, as payments often stretch into longer time periods. Many MSMEs are understood to have also given up their registration to avoid the clause.

Several industry associations had raised the issue with the Finance Ministry at the time of the Interim Budget in February and were hoping it would be addressed in the Union Budget.

The Federation of All India Vyapar Mandal, which had even filed a petition with the Supreme Court regarding the rule, has expressed disappointment over the absence of a remedial measure in the Budget.