45 day payment rule for msme

MSME Timely payment rule to take effect in 2024-2025

Q: What is meant by the “appointed day”?

As per section 2(b) of the MSMED Act, the 'Appointed Day' is the expiration date after 15 days from the acceptance of goods or services by a buyer from a supplier.

Q: What is the time limit for making payments to MSME as mentioned in the MSMED Act?

If there is no written agreement, payment must be made within 15 days. With a written agreement, payment must be made within 45 days from the date of receiving goods or services.

Q: Is payment made to the traders also fall under Section 43b(h)?

Section 43b(h) applies to payments made to MSMEs. Traders qualify only if they meet the MSME criteria; otherwise, the section does not apply.

Q: What is the MSME 45 days payment rule in 2024? Is it the new rule for payment within 45 days?

Yes, the 2024 rule under Section 43b(h) mandates payments to MSMEs within 45 days of receipt of goods or services if there is a written agreement. Delays may lead to disallowance of expense deduction.

Q: Is MSME to be paid within 45 days?

Yes, under the MSME Development Act, payments must be made within 45 days of accepting goods or services.

Q: What is the applicability of the MSME 45-day payment rule?

It applies to all buyers, including large companies, requiring them to pay MSMEs within 45 days if there's a written agreement. Without an agreement, payment is due within 15 days.

Q: What is a 45-day payment term?

It is the maximum allowed time to pay MSMEs after accepting goods or services, beyond which interest is payable.

Q: What are the rules for delayed payments under MSME?

Delayed payments beyond 45 days attract monthly interest compounded at three times the RBI's bank rate.

Implementation of timely msme payment in 45 days rule taking effect soon. According to the Finance Act 2023, companies must pay the Micro, Small, and Medium Enterprises (MSMEs) sector within 45 days, which is scheduled to take effect from April 1, 2024.

Noorleen Kaur Bhatia

14 Mar 2024 • 6 min read

( As per Finance Act 2023)

Delayed msme payments put a strain on cash flow for MSMEs. It prevents you from meeting your day-to-day expenses, and settling your payments, and limits your growth too. Due to delayed msme payments, you have to increase your borrowings and take a debt to manage your expenses.

But there has yet to be a rule finalised on msme repayments. Delays in these msme payments are due to unfair bargaining, unorganised payment processes, lack of awareness regarding exercising their right to receive timely payments, and more.

To help MSMEs receive timely payments, the government has decided on a new rule.

Latest update - Industry Split on MSME 45-Day Rule Ahead of Budget 2025

Ahead of Budget 2025, the industry is split over the msme 45 days payment rule. While it has improved cash flow for some, others say it worsens liquidity in sectors with longer capital cycles. Experts urge sector-specific tweaks over a full rollback to balance compliance and operational needs.

Key Points:

45-day rule aims to ensure timely payments to MSMEs.
Some sectors face cash flow strain due to long working capital cycles.
Large firms are adjusting practices to comply, facing operational challenges.
Industry demands sector-specific changes rather than complete rollback.

Budget 2025 may address these concerns with tailored solutions.

Source: Economic Times

The 45-day timely payment support for MSMEs in 2024-2025

The Indian government is taking a step to improve cash flow for Micro, Small and Medium Enterprises (MSMEs). The MSMED Act already mandates payments within 45 days of accepting goods or services, but a new rule in the Finance Act 2023 strengthens this.

As per the Finance Act 2023, companies need to make payments to the MSME sector within 45 days, expected to come into effect from April 1, 2024. And timely payment rule has been implement keeping MSMEs in mind.

And a full-fledged implementation of the same would be finalised after the union budget 2024-2025.
Effective April 1, 2024, if big companies fail to pay MSMEs within 45 days, they'll lose the ability to claim tax deductions on those payments. This incentivizes timely payments and aims to create a more stable financial environment for MSMEs in India.
Companies that fail to pay MSMEs within 45 days will not be able to claim tax deductions on those payments. This encourages timely payments and improves cash flow for MSMEs.

This new rule has a dual effect:

Why Businesses Need to Adapt for MSME Timely payment rule in 2024-2025-

Companies that buy from MSMEs will need to adjust their payment cycles. This might involve:

Streamlining internal approval processes to avoid delays.
Negotiating payment terms with suppliers to ensure they fall within the 45-day window.
Exploring alternative financing options to meet cash flow requirements if necessary.

Boost for MSMEs with MSME timely payment rule :

MSMEs can finally expect faster payments, leading to several benefits:

Improved cash flow: Faster access to funds allows for smoother operations and investment in growth.
Reduced financial stress: Predictable payments eliminate the anxiety of delayed invoices.
Stronger financial stability: Consistent cash flow strengthens the financial health of MSMEs, allowing them to weather economic fluctuations better.

Overall, the timely payment rule aims to create a more balanced and supportive ecosystem for MSMEs in India.

Conclusion:

The Indian government's new rule related to MSME Timely payment rule to take effect in 2024-2025 is a significant step towards a more robust and financially secure future for this vital sector. By enforcing the existing 45-day payment mandate and penalizing late payments through tax implications, this initiative creates a win-win situation.

MSMEs will need to adapt newer timely payment practices, but MSMEs stand to gain a critical boost in cash flow, reduced financial stress, and greater stability. This reform paves the way for a more balanced ecosystem where MSMEs can thrive and contribute more effectively to India's economic growth.

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Frequently Asked Questions-

What is the MSME Form 1 filing deadline?

April 1 – September 30: File by October 31.
October 1 – March 31: File by April 30.
For FY 2024–25, the April 30, 2025 deadline applies to the second half.

Who must file MSME Form 1?

All companies registered under the Companies Act, 2013, including LLPs, that have:
Outstanding payments to MSME suppliers beyond 45 days, or
Made delayed payments during the reporting period.
Even if there are no outstanding dues, a 'NIL' return should be filed to demonstrate compliance.

What is meant by the “appointed day”?

As per section 2(b) of the MSMED Act, "Appointed Day" represents the date when a particular amendment or rule related to payments to MSMEs becomes applicable. Here it refers to expiration date post 15 days of accepting of goods or services by a buyer from a supplier.

What is the time limit for making payments to MSME as mentioned in the MSMED Act?

The time limit for making payments to MSME as per MSMED Act is dependent upon the written agreement between the buyer and the MSME.-
With no written agreement- Buyer has to make payment within 15 days from the date of receiving goods and services.
With written agreement- Buyer has to make payment within 45 days from the date of receiving goods and services.

Is payment made to the traders also fall under Section 43b(h)?

Section 43b(h) of the Income Tax Act MSME specifically applies to payments made to MSMEs. Traders, if they meet the criteria of being a micro, small, or medium enterprise, would fall under this section. However, if a trader doesn't meet the MSME criteria, the section wouldn't apply to payments made to them.

What is the MSME 45 days payment rule in 2024? Is it the new rule for payment within 45 days?

Yes, The MSME 45 days payment rule in 2024 mandates that buyers must make payments to MSMEs within 45 days of receiving goods or services if there's a written agreement between the parties specifying a credit period of more than 15 days.This rule is enforced through Section 43b(h) of the Income Tax Act, which imposes penalties on buyers for delayed payments.

Is MSME to be paid within 45 days?

Yes, under the MSME Development Act, buyers must pay MSMEs within 45 days of accepting goods or services.

What is the applicability of the MSME 45-day payment rule?

The MSME 45-day payment rule applies to all buyers, including large companies, who must pay MSMEs within 45 days of receiving goods or services, provided there is a written agreement. If there is no agreement, the payment must be made within 15 days. The rule aims to ensure timely payments and improve cash flow for MSMEs.

What is a 45-day payment term?

It refers to the maximum period within which payment must be made to MSMEs after goods or services are accepted—beyond which interest is charged.

What are the rules for delayed payments under MSME?

If payment is delayed beyond 45 days, the buyer must pay monthly interest compounded at three times the RBI's bank rate.

What is the transaction limit for MSME?

There’s no specific transaction limit, but as per the Revised MSME Classification Criteria (Budget 2025), eligibility is based on investment and turnover:

Micro: Investment up to ₹2.5 crore, Turnover up to ₹10 crore
Small: Investment up to ₹25 crore, Turnover up to ₹100 crore
Medium: Investment up to ₹125 crore, Turnover up to ₹500 crore

These limits define MSME status and determine compliance requirements and access to government benefits under the MSME Act 2024.

What is Section 43B(h) of the Income Tax Act in relation to MSMEs?

MSME Section 43B(h), introduced in 2024, mandates that payments to MSMEs must be made within 45 days (or 15 days if no written agreement) to claim the expense as a deduction in the same financial year; otherwise, it can only be claimed in the year the payment is actually made.

Explore more on current MSME updates-