Yesterday, 6th May, The Supreme Court declined an appeal by Micro, Small, and Medium Enterprises (MSMEs) regarding the 45-day payment rule. This rule mandates that companies must clear dues within 45 days to MSMEs. The court’s decision reinforces the importance of timely payments for the financial health of smaller businesses.
New Delhi: The Supreme Court rejected a plea made by micro, small, and medium enterprises (MSMEs) challenging a provision in the Income Tax Act. This provision prohibits businesses from extending credit to buyers for more than 45 days. Violating this rule can lead to penalties, including compounded interest penalties at three times the bank rate set by the Reserve Bank of India (RBI). Additionally, businesses risk losing the ability to deduct payments made to MSEs from their taxable income.
The provision specifically applies when a business purchases goods or services from an enterprise registered under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act). Some MSMEs expressed concerns that this provision may result in larger buyers bypassing small and medium suppliers and instead choosing to purchase from unregistered enterprises.
The Federation of All India Vyapar Mandal, representing the MSMEs, filed the plea but has been allowed by the Supreme Court to withdraw the petition and approach the high court.
In February, the Confederation of All India Traders (CAIT), a traders’ body, met with Finance Minister Nirmala Sitharaman and requested a one-year postponement of the implementation of this clause until April 2025.
CAIT, in a memorandum addressed to the finance ministry, has expressed its endorsement of the government’s decision, highlighting the significance of guaranteeing timely payments to the MSME sector within a 45-day timeframe. However, pointing to a “lack of clarity” regarding how the law applies to traders and other related provisions, CAIT urged the government to pause the enforcement of the clause. They suggest waiting until there is adequate clarification and nationwide dissemination of information before implementing the rule.
The decision highlights the court’s stance on maintaining stringent payment schedules to support the financial well-being of MSMEs, while also balancing the interests of larger corporations and the overall business ecosystem. The ruling serves as a clear message about the importance of adhering to contractual payment terms and the legal safeguards designed to protect smaller businesses from undue financial pressure.