MSME Payment Rules: Your Complete Guide

One of the key problems faced by Micro, Small, and Medium Enterprises (MSMEs) is delayed payments. This MSME payment rule states that expenses related to goods and services supplied by MSMEs can be deducted within the year if the business payment is made within the deadline as under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. We will cover what the MSME rule for payment is, the objectives, and how it impacts small businesses.

What Is the Scope of the MSME Payment Rule?

The MSME payment rule extends to any transaction that involves Micro, Small and Medium Enterprises, whether they operate in the public or private sector. There are different business arrangements involving the supply of goods and services by MSMEs to larger enterprises to which this payment law extends. These include supply contracts, service agreements, procurement deals, and subcontracting, among others. These rules ensure prompt payment to improve MSMEs' financial stability.

What Are the Objectives of the MSME Payment Rule?

MSMEs often receive delayed payments, where they do not get the amounts owed to them on time. This payment regulation was set up to improve the growth and development of MSMEs and create a business environment that allows their operations to grow. These small business rules create more inclusivity and encourage development. Timely payments can also minimise disputes between buyers and MSMEs, leading to more efficient business transactions.

Key Components of the MSME Payment Rule

Some of the key components of the MSME rules for payment include:

• Definition of MSMEs: A clear definition of MSMEs that come under the payment policy will be included based on investment and turnover criteria. This helps in understanding applicability.
• Prescribed payment timelines: The payment standards include the timeline within which payments must be made. 
• Consequences for non-compliance: This will cover the interest that late payments can result in, as well as penalties and other consequences.
• Grievance redressal mechanisms: MSMEs can gain clarity on how to gain help for resolving payment disputes quickly.
• Stakeholder awareness program: Stakeholders require training sessions to educate buyers about their rights and obligations under the MSME rules. 

Benefits of the MSME Payment Rule

The MSME payment rule was introduced to ensure that any sum owed to them is paid within a reasonable period. This payment regulation has several benefits for MSMEs:

• On-time receipt of payments: This ensures that MSMEs can maintain a steady cash flow.
• Better operational efficiency: This enables better planning and smoother operations.
• Increased business confidence: Reliable payment timelines build trust and provide incentives for more business ventures.
• Organic economic growth: More inclusive small business rules improve overall economic development.

Challenges and Concerns of MSME Payment Rule

The MSME payment rule has certain issues with implementation and enforcement. These are:

• Lack of awareness: Not many MSMEs know about, or fully understand, their rights and duties under the SME regulation.
• Enforcement issues: There may be delays in grievance redressal or enforcement of penalties and fees.
• Difficult dispute resolution: The process of solving payment-related issues can be overly complex, lengthy, and resource-heavy. This can negatively affect business operations.
• Strained business relationships: Rigid MSME payment terms can strain business relationships between buyers and sellers. This can affect the quality and nature of transactions.

Steps To Ensure Compliance With the Rule

There are many ways to ensure compliance with the MSME payment rule. Some of these are:

• Automated payment systems: These can ensure more accurate and detailed transaction records that carefully keep track of payment terms and dates.
• Regular audits: These can make sure that payment deadlines are followed, which can lower the need for dispute resolution.
• Clear payment terms: Here, penalties for late payments can enforce timely compliance.
• Stakeholder training: This can increase awareness and understanding of the requirements of the MSME payment rule and create a culture of compliance.
• Quick grievance resolution: By promptly addressing late payment issues, MSMEs can consistently ensure compliance with payment rules.

What Is Section 43B(h)?

Introduced by The Finance Act 2023 and effective from April 1, 2024, this section contains the MSME new rules involving the payment deadlines for goods and services supplied by MSMEs. It states that companies must complete payments to SMEs within 45 days to be eligible for deductions. This provides incentives for on-time payment as it reduces their taxable income. These MSME guidelines aim to encourage more timely SME payments and can impose fees and penalties if not complied with. This amendment aims to promote timely payments to micro and small firms and address the issue of working capital scarcity in this sector. 

Section 43B(h) Explained

The MSME new rules aim to guarantee prompt payments to the MSME sector. Alongside Section 15 of the MSMED Act, 2006, the rule states that businesses have 45 days to pay their debts to MSMEs if there is a written agreement. In case there is no written agreement, the payment should be made within 15 days. The penalties under the MSME payment rule involve a tax liability on the outstanding balance if noncompliance occurs. This incentivises companies to meet the payment deadlines as doing so reduces their taxable income. This SME regulation aims to improve the growth and development of MSMEs and create a business environment that allows their operations to grow. 

The 45-Day MSME Payment Rule: Explained

The 45-day MSME payment rule states that buyers must fulfil their payments to MSMEs within 45 days of receiving and accepting goods or services provided by them. By ensuring faster access to payments, the rule strengthens the working capital of MSMEs, allowing them to invest in growth, manage operations smoothly, and avoid dependence on expensive short-term credit. On the other side, larger businesses, or firms, can deduct payments made to MSMEs in the same year, potentially lowering their taxable income as long as they follow the deadlines. However, non-compliance can lead to penalties as well as an increased liability for the buyer to pay tax on the excess amount. This encourages rule compliance and open financial practices, which creates a responsible corporate climate. 

How 45-Day MSME Payment Rule Impacts Small Businesses

The 45-day rule to ensure MSME compliance in payments can largely impact small businesses’s day-to-day operations by enabling:

• Smoother payment cycle: This creates consistent cash flows, making regular business operations smoother.
• Better bargaining power: SMEs may have a stronger position in negotiating as prompt payments are more likely.
• Reduced disputes: It can minimise conflicts over late payments, fostering better relationships with clients and suppliers.

Conclusion

While MSMEs significantly contribute to the Indian economy, they face the challenge of delayed payments that can disrupt operational efficiency and strain business relationships. The 45-day MSME payment rule, by mandating timely payments within 45 days, strives to ensure steady cash flows for MSMEs and cultivate stronger relationships between buyers and sellers. 

To further enhance their cash flows and invest in growth opportunities, small and medium businesses can benefit from MSME loans. SMFG India Credit offers tailored business loans for MSMEs of up to INR 75 lakhs* without any collateral. We offer attractive interest rates, and flexible repayment options to ensure that MSMEs get reliable financial support to flourish.