The finance ministry is looking to modify the income tax rule on payments to micro, small and medium enterprises (MSMEs) within 45 days.

The new rule, to take effect from April 1, is being reviewed by the North Block officials following demands from industry.

While some businesses have sought the deferment of the provision by a full financial year, others want an extension of the deadline.

The Finance Act 2023 inserted a new clause (h) in section 43B of the Income Tax Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the specified time limit of 45 days will be allowed as deduction only on actual payment. The buyer will have to pay tax on the payment if it is not done in the specified time limit.

Finance ministry officials said the government is considering the industry request “to see if there is any scope of the amendment to the clause”.

Analysts said: “The impact of the clause might be uneven across different MSME sectors. Some industries or businesses with weaker bargaining power might struggle to enforce timely payments. Overall, Clause (h) presents a double-edged sword for MSMEs. While it has the potential to improve their financial health and bargaining power, the effectiveness hinges on ensuring timely payments from larger entities and minimising compliance burdens for MSMEs.”

The new rule of timely payment to MSMEs within 45 days should be postponed by a year or suspended till sufficient clarity is brought to the companies, the Confederation of All India Traders (CAIT) said in its representation to the finance ministry.

“The new provision in the Income Tax Act aims to enhance financial liquidity for micro and small enterprises (MSMEs). However, there is a need for greater awareness among traders about this beneficial provision and they propose a one-year postponement of its implementation. This delay would allow traders ample time to understand and comply with the law smoothly,” CAIT secretary-general Praveen Khandelwal said.

A section of MSMEs, such as those in the textile industry, are worried that this new rule could impact their relations with suppliers and buyers, who often work with these small businesses on a credit system. Others are worried that their systems are not ready for this provision.

The Tamilnadu Spinning Mills Association (TASMA) has written to the Finance and MSME ministries saying the clause has triggered a panic among suppliers and buyers in the textile value chain. “Even though, the decision to introduce Section 43B(H), to the Income Tax Act 1961, … many buyers, who have been receiving the goods/supplies hitherto with a flexibility of payment period as agreed upon between both the parties, are now hesitant to accept the goods, when the payment terms are limited to 45 days only,” the association said.

In certain trades in the textile industry, the payment period has been accepted by the supplier as well as the buyer as 90 days and transactions have been going on smoothly without any issues. Suppliers and buyers feel that 90 days will be necessary to get the payment considering the nature of the goods which undergo further value-addition through other processes, TASMA said.

Hence, it has urged the MSME ministry to amend the clause allowing 90 days to settle the payment. “If this cannot be introduced as a General Amendment to the Act, it can be considered restrictively for the textile industry alone suitably, considering the ongoing business practices.”

According to the delayed payment monitoring portal MSME Samadhaan, 1.76 lakh applications have been filed by MSMEs against their buyers for delaying payments. This involved Rs 41,105 crore stuck for such MSMEs, of which only 34,551 cases involving Rs 6,052 crore have been disposed so far by the MSE Facilitation Councils.