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What is MSME 45 Days Payment Rule?

MSME 45 Days Payment Rule
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Implementation of MSME 45 Days Payment Rule

The new MSME 45 Days Payment Rule that only allows companies to not accept any payment which is over 45 days from the supply date for businesses registered under micro, small and medium enterprises (MSME) will not be recognized as expenses that add to their profit as far as taxation is concerned has resulted in considerable inconveniences to the organized apparel retailers, sources told FE.

Simply put, the amendment – Section 43B (h) of the Finance Bill 2023 – holds that additional income tax due to the payment to MSMEs above the agreed terms (say 45 days) will be charged to the profit instead of being counted as an expense, which means that companies will have to pay tax on their MSME payments if this is not complied. The point is now being taken The MSME 45 Days Payment Rules are tougher in the circumstance that there is no written agreement, as the time of payment shall be a maximum of 15 days while in the written agreement that is 3 months.

Video Credit: YouTube/DCMSME

The body’s recommendation to the Finance Ministry for the tax rule to be put on hold till the end of the 2023-24 fiscal year, with a possible staggered implementation over a three-year period, shows the urgent need for immediate action to fight poverty. The latter has also embarrassed with a request of treating as excluded from the rule, financial transactions between one MSME and another MSME that were occurred in a case of the goods sourced.

CMAI shares that some apparel retailers have been seen to be cancelling their already placed orders to register MSMEs as they remain neither sure nor to be certain about the feasibility of the rule for ongoing financial year. In the coming few weeks, cancellations would grow and the amount of loss could be in the range Rs 5000-7,000 crore, which might be hit, in sum, on the order size.

Ruling applies to all organizations, but FMCG companies and pharmaceuticals are said to be hard-pressed by this measure; apparel retailers who are reliant on cycles for making payments to vendors (registered MSMEs) and especially new entrants, too are likely to partake the negative impact. This is exacerbated by the fact that they frequently also purchase from MSME suppliers that are involved in regular transactions with them, adding further pressure since business models could be disrupted by the new payment rule.

Marginal financial services companies have the credit cycle of up to 3 months to 6 months with their suppliers and business partners. The credit structure that allows payment within 45 days not suitable for them. Because of this, sale of receivables is the best way for saleable financial services companies to generate working capital to fund their working capital needs.

Tarun Arora who is the chief executive officer of Zydus Wellness, the makers of the Complin, the health food beverage, was happy to inform that his company make all the prompt payments to registered MSMEs as per the deadline provided. “Even what is hardwired into making payments deadlines that we have to keep. The changes that are applied to them are not also affected to us,” he added up.

On the other side, a few FMCG top executives who agreed not to be quoted have premises that the waiver that the money paid to the registered Micro Small and Medium Enterprises (MSMEs) as an expense is a brutal decision. “One CEO said, “The imposition of the MSME 45 Days Payment Rule to shield the MSME Sector is a welcome measure; however, such a new regulation would make the big companies no longer want to deal with the SME suppliers” . “Another effect of such an implementation is that the small business people may decide to cease doing business because of fear of loss of their customers.”

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