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The Union Budget may not make any change in the 45-day pay rule in Income Tax law as the government has amended the Company Law order and notified new form for reporting by companies about delay in payment to micro and small enterprise suppliers. Tax and legal experts are divided over how the change will impact compliance burden for large companies.
The “45-day rule” stems from Section 15 of the Micro, Small and Medium Enterprises Development Act 2006, which mandates payments to micro and small enterprises within 45 days in case of written agreement and 15 days in case of no-written agreements. There have been numerous instances when payment was delayed. The government stepped in to resolve this and the Finance Act 2023 inserted a new clause in section 43B of the Income Tax Act that prescribes that companies not making payments to micro and small enterprises during a fiscal year will have to wait for a full year for deductions under the IT Act.
Now, on July 15, the Corporate Affairs Ministry has added a proviso in the Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019. It prescribes that “only those specified companies which are having payments pending to any micro or small enterprises for more than 45 days from the date of acceptance or the date of deemed acceptance of the goods or services under section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 shall furnish the information in MSME Form-1.”
Decoding the amendment, Manendra Singh, Partner with Economic Laws Practice, said the notification now requires filing of form if there has been any default by a company in payment beyond 45 days. Also, the form now requires a lot more details as compared to the earlier form.
“This will surely increase a lot of compliance burden on companies, which however, may in hindsight push them to ensure that there are no defaults for more than 45 days, in which case form filing may not be applicable,” he said.
According to Stuti Galiya, Partner at Khaitan & Co, the revised version of MSME Form-I, there are comprehensive reporting requirements. For example, the form now requires specified companies to provide details of all payments outstanding and payments made to MSME supplier within 45 days and even thereafter.
Industry Concerns
This income tax provision of Finance Act 2023 has caused a lot of consternation among a section of micro and small businesses. These businesses maintain that they are losing orders from large companies and want the government to amend the provision. However, another section has voiced for continuity. The matter also reached the Supreme Court, which dismissed the plea opposing the changes.
Sameet Gambhir, Co-Chair, Corporate Affairs Committee, PHDCCI, said: “While the intention of 2019 order was good, its impact was imposing a compliance burden on industries, as they were required to file return every six months even if there is no outstanding to MSME beyond 45 days. That was unnecessary compliance burden on the companies who were compliant and prompt in making payment to MSMEs. Further so many returns may also be making it difficult to review these and the very purpose of submission of these returns was somehow lost.”
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