What lies ahead: Decoding the 45-day MSME payment rule

Historically, micro and small businesses (MSEs)—a significant chunk of the Indian MSME sector—bear the brunt of delayed payments, impeding business operations by restricting cash flow. A lot of them also have to shut shops.

To address this concern, in the Union Budget 2023, Finance Minister Nirmala Sitharaman announced that starting April 1, 2024, the government would permit expense deduction on income tax claims for buyers only when they make payments to suppliers, i.e., the MSEs.

The announcement read that MSEs are supposed to receive payments within 45 days if there is an agreement and/or within 15 days if there is no agreement. While the 45-day payment rule has existed since the MSMED Act of 2006, its implementation was a failure. 

Therefore, this announcement has stirred chaos in the MSME ecosystem, with many business owners witnessing order cancellations and others expressing concerns about meeting the 45-day payment deadline.

Mukesh Mohan Gupta, President of the Chamber of Indian MSMEs, says this announcement stands among the most significant developments for the MSME sector.

“The primary worry for MSMEs has been the delay in payments. Although the 45-day payment rule has been in place since 2006, both suppliers and buyers were not consistently adhering to it. This announcement now strengthens its enforcement,” he adds. 

The obligation to make payments by April 1 is causing concern among numerous buyers, who have cancelled orders from suppliers scheduled for fulfilment after February 16, 2024. 

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Micro-enterprises face the brunt of delayed payments, but what’s the solution?

According to Neeraj Kushwaha, Founder of Bhopal-based Technosys, which provides turnkey solutions and services in building management systems, the recent adjustment in the 45-day payment rule for MSMEs could prove disastrous for micro and small enterprises. 

The move—intended to mitigate the challenges MSMEs face—could potentially worsen their situation leading to business losses.

He warns that buyers might opt for medium or large enterprises for their needs. Or it could go the other way, where buyers seek MSEs not registered under the Udyam portal.

Praveen Khandelwal, Founder and General Secretary of the Confederation of All India Traders (CAIT), says that the government announced this development at the request of the priority sector (micro and small enterprises). 

“This is the need of the hour since these businesses struggle with late payments. However, clarity is needed as to whether traders also fall under this category.”

He adds that traders registered under the Udyam portal seek priority sector lending. Now, if they fall under this new development, they would need more time to adjust to it.

There is also uncertainty regarding the situation, where the buyer and supplier agree to a contract specifying an extended payment period. 

However, Gupta asserts that the MSMED Act of 2006 precedes any legal contract. As per government regulations, payments must be made within 45 days of the agreement and 15 days in the absence of the agreement. 

What lies ahead?

Vanesh Naidoo, Founder of Pune-based Safe Cams, says the new government regulation is a step in the right direction and will significantly help with the working capital. 

“Although some of our larger customers were already following a 45-day payment cycle, we feel that making this an official mandate by the government helps our position as an MSME, especially since our business operates on a CAPEX model where payments arrive later,” he adds. 

He highlights that the regulation will also help when completing quarterly GST submissions and payments as now both inward and outward GST will be more aligned. 

“Overall, this is definitely a favourable advancement for MSMEs and will certainly benefit both MSMEs and their customers,” he adds.

But what about the apprehensions of MSEs, who are anxious and considering giving up their Udyam registrations to prevent their clients’ loss?

MSMEs have to help themselves as they must adhere to the Udyam registration, says Gupta, adding, “It is my appeal to MSMEs to get registered (if they are not) so that the apprehensions that they have that the clients will go away, will be dismissed.” 

Gupta also recently launched a programme called MSME Mitra, which has appointed 2,200 people to go across industrial areas and get enterprises registered under Udyam free of cost.

He says that MSME registration should be made mandatory, just like GST or Aadhaar, and most of the problems would be solved. 

(The copy was updated to correct a typo.)