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In the business world, where time moves pretty fast, being well-updated on issues that affect business has become as important for Micro, Small, and Medium Enterprises (MSMEs) just like it is for any business. Little by little the most recent development appeared in the form of a new payment schedule which is expected to be implemented on April 1, 2024.

This policy formulated and approved by the Finance Minister’s office stands as the most important policy for the MSMEs to understand and apply. In this article we are going to see why MSMEs should be very vigilant about this new rule, its implications and how accepting it can lead to their chances of thriving and gaining a foothold in a world of fiercely competitive businesses.

The government of India in one of the measures which are to help small and medium scale enterprises finance the health of MSMEs in India, announced the introduction of a rule that will instead have the relevant organizations settle their payments through MSMEs in a maximum of 45 days. If companies do not abide by the voted tax rule, they shall be subject to the tax penalties imposed on them.

As per two senior officials of the finance ministry, a review of any such rule which that pertains to the scope of this case can only happen in July at the time of the Union Budget when the government’s stand on this issue is  visible. Section 43B (h) of the Income Tax Act that came into force including the Finance Act 2023 is concerned with compulsory payments at immaculate instant to MSMEs so it helps in maintaining unimpeded cash flow and in sustainable ensuring of economic cooperation.

MSME’S New payment Rules

captainbiz msmes new payment rules

From the fiscal year 2024-25, a new regulation came into force for the Indian companies to advance the invoice amount with small businesses that are struggling for cash flow. Concerning this regulation, it is clearly stated that companies have to settle the bills related to the small business outstanding in 45 days after the receipt of them. Such companies, lacking the mentioned requirement for the fiscal year 2023-24, will have to pay an increased tax burden. This is a consequence of their only being able to deduct for payments made in the relevant tax year. Businesses are not only required to abide by the regulations but also avoid the imposition of extra taxes if they wish to attain this objective.

Decoding Section 43B: Tax Compliance Explained

In India, the recording of purchases is as they happen, that is before a businessman sends any payment to sell off anything sold. Nevertheless, the limit is that these laws might not be effective as required except if they are actually implemented which is not certain now.

From April 1, 2024 onward, If both of the parties can settle, the payment should be submitted within 45 days. To address this concern, Section 33 provides for measures to ensure that in cases where payment of their debts is due by the end of the financial year 2023-24 to Small and Medium-Sized Enterprises powered by the corresponding certificates, but payment is done after the fiscal year, it is counted as an expense in the financial year 2024-25, and not Consequently, the danger exists that corporations will need to rephrase the point on how they relate with the balance sheet and form of their commercial agreements.

 When the business does not follow these laws, it is not allowed to deduct these payments the same year they came due. Indeed, they should not be able to reduce them in advance, but rather in the year that they pay them. Which means expenses like these can be claimed as soon as the payment is made unlike the accrual basis. Such a move will likely result in extra taxable income and business taxes. Businesses worry that this could be at their expense in the next financial year, 2025-24.

New MSME’S Payment Rule

As stated by one senior finance ministry official, “Companies now have a 45-day term of payment to the MSME sector as per the Finance Act 2023. Organizations that disagree to comply with this period will not have deductions clauses to claim. This clause will, however, get the overdue amount to be taxed.”

A government in India took a step to keep micro, small and medium enterprises afloat in financial terms, by enforcing a legislation which mandates all payments made to MSMEs be done within a single month and fifteen days. Taxation charges on the default amount will follow if the company is delayed to pay the stipulated prayers. Under the finance ministry, two senior officials declare that the possible way to make an alteration is via the Union Budget in July, underlining the firm position of the government about the case. The provision of section 43B(h) of the Income 

Tax Act 2023 which was enacted by Finance Bill 2023, made timely payment for MSMEs to be done to ensure escalation of streams of income and the prevention of disruption of cash flows which is essential to economic sustainability.

Also Read: MSME Payments Alert: Pay By March 31, 2024, To Comply With 43B(H)

Key Benefits of the New Payment Rule for MSMEs

  • Prompt Payment Assurance:

The new payment rule puts at the forefront the more immediate payment to the MSMEs destined to eradicate the cash flow problem and financial instability.

  • Reduced Payment Delays:

MSMEs have an opportunity to less wait for their proceeds after providing goods & services to customers, thereby enhancing their internal effectiveness.

  • Streamlined Cash Flow Management:

Thanks to the fact that they receive a more regular payment schedule, MSMEs can have better cash flow management which means that they don’ t need to guess and they can plan for growth.

  • Increased Business Confidence:

Certainty of time payments helps MSMEs build their faith in keeping their businesses running and makes them engage in innovation, expansion, and long-term sustainability.

  • Level Playing Field:

This new regulation allows  small enterprises, MSME, to compete effectively by removing the negative implications of late payments compared to those large business counterparts.

  • Boost to Economic Growth:

The new general payment regulation plays the role of catalyst as the MSMEs which include a large share of economies’ economic investment power can easily carry out transactions in an environment where paying for goods and services is no longer restricted.

  • Enhanced Supplier Relationships:

The phasing of payments, with punctually scheduled payments, ensures that bonds of cooperation grow stronger between the suppliers and MSMEs, thus promoting a wholesome business environment.

  • Compliance Benefits:

Implementation of the new rules of payments demonstrates the goodwill of MSMEs, which in turn helps in customer’s and investors’ partnership.

  • Mitigation of Payment Risks:

The small businesses can also buffer off the risks such as financing and play around for the unpaid debts hence strengthening their ability to mitigate such disturbances in the market conditions.

  • Government Support:

Promulgation of a new payment rule is a sign of the GoV’s willingness to back MSMEs with the full realization that their contribution to economic progress can’t be overlooked in light of their job creation role.

 Benefits of New Payment Rule for MSMEs

BenefitDescription
Improved Cash Flow Management1) Timely payments ensure consistent cash flow, enabling MSMEs to meet operational expenses efficiently.
2)Enhanced predictability allows for better financial planning and investment in growth initiatives.
Enhanced Credibility1)Compliance with payment deadlines builds trust and credibility with suppliers, creditors, and partners.
2)Demonstrating reliability enhances the reputation of MSMEs and fosters stronger business relationships.
Increased Access to Financing Opportunities1)Positive payment track record may lead to improved credit ratings, facilitating access to loans and financing.
2) Establishing financial stability increases MSMEs’ eligibility for investment opportunities and partnerships.

Conclusion

Lastly, adopting the new payment standard is especially crucial for MSMEs to safeguard their future and compete in the competitive business world. Through prompt remittances, MSMEs can substantially upgrade their financial stability, credibility and access to chances for development and expansion. Though it is a difficult path to compliance, active adaptations due to strategic planning, collaboration, and digital solutions application will place MSMEs in favorable conditions to continue to develop and prosper in a competitive market. Beside the short term gains being realized from the adherence, MSMEs have to encourage reliability and trustworthiness as the culture that will keep them sustainable in the future.

Also Read: How to Calculate GST in an Excel Sheet: Step-by-Step Guide

FAQ

  • Does the help of new payment guidelines to the financial balance of MSMEs be a problem?

Answer: The implementation of the new rule on payments guarantees that the MSMEs get paid on time, and this ultimately leads to better management of MSME cash flows. This paves a way for them to accomplish their daily activities, invest in new ventures and stay stick to their activity even in economic instability.

  • What should be closer in the new rule plan about the final payment system MSMEs consider?

Answer: The main elements of the new law are the timeline for defining the dates, fines for the ones who will pay late, the mechanism for enforcement, and the guidelines for disputes. Being aware of the elements is essential for the MSMEs and needs to be thoroughly revisited for the sake of compliance.

  • How, in the long run, would creditors and MSMEs be benefited if they abide by the new payment rule?

Answer: This rule provides important advantages to MSMEs with better cash flow management, a boost in credit rating, better relationships with suppliers and creditors, and wider financial opportunities.

  • What can be the typical issues implied for the new MSMEs because of the new payment legislation must be asked?

Answer: Implementing new payment rules is not a walk in the park as you have to be prepared to handle resource constraints, technological limitations, poor understanding or slack awareness, and the resistance to change that comes with being a traditional payer.

  •  What measures can MSMEs take to be sure compliance with the new payment rule will last?

Answer: MSMEs can foster strategies like digital payment solution funding and employees and stakeholders about the value of compliance. They can be resource pooling with the financial institutions, and industry peers and simplify invoicing.

  • Guiding MSMEs on how to use digital payment Gateways (SMPs) in ensuring their Economies comply with the new regulations?

Answer: Small businesses can take advantage of digital payment solutions in the way they send invoices, set deadlines and speed up  transactions. As a matter of fact, the rule would not only be implementable in this way, but it would also help run smoother operations and  easier administration.

  • What kind of assistance and resources exists for MSMEs shall be identified on how they will go through this new policy rule?

Answer: MSMEs can look for backing and resources from government agencies, industry associations, banks and online platforms that proffer the needed directions and instruments that guides MSME’S to adhere to provisions of the new rule on electronic payment.

  • Do requirements for such a payment rule entail financial sanctions, and if so, what ones?

Answer: Yes, you will most likely be charged some fine and penalty if you fail to comply with the new rule for bill payment, which can also result in penal charges and interest charges on overdue payments or it can destroy the good reputation of business. The extent of sanctions might be different from one jurisdiction to another while besides the specified terms in contracts or agreements depending on the provisions of the both parties.

  • What do mid-term fiscal implications of the non-compliance in the new payment rule have for the success of MSMEs future and sustainability?

Answer: Failure to swim with the new payment rule may lead to the long-term undercurrents of MSMEs which include reputational risks, poor business relationships, lack of access to financial facilities, and even legal consequences. Another problem is that it might prevent them from competing in the market and stay successful over time. The whole business development process might be jeopardized when a company is closed.

  • How can MSMEs be assured that this fact will not be deleted or amended if there are any changes in regulations or updates to the payment reform?

Answer: MSMEs should stay ahead of the rule to catch any changes to the payment by continuously monitoring the regulatory updates, as well as being engaged in industry forums and discussions, and remaining in communication with key stakeholders including regulators, financial institutions and industry associations. In addition, being well equipped with adaptable payment platforms and keeping relationships with the current technology sources allows MSMEs to be responsive when there arises any regulations affecting the policies of payments. Apart from that it is critically important that the internal policies and procedures of the company will be regularly reviewed and also updated to bring them in line with novel existing regulatory standards.

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Rutuja Khedekar Freelance Copywriter
Rutuja is a finance content writer with a post-graduate degree in M.Com., specializing in the field of finance. She possesses a comprehensive understanding of financial matters and is well-equipped to create high-quality financial content.

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