New Delhi, Jul 1 (KNN) The Ministry of Finance is reportedly evaluating potential changes to the income tax regulation that requires businesses to settle payments with micro, small, and medium enterprises (MSMEs) within 45 days, according to sources familiar with the matter.

Finance Minister Nirmala Sitharaman may announce these revisions during the upcoming 2024-25 budget presentation.

Officials in North Block are currently reviewing the rule, which took effect on April 1, 2023, in response to industry demands.

The Finance Act 2023 introduced clause (h) in section 43B of the Income Tax Act, stipulating that payments to micro or small enterprises beyond the 45-day limit specified in the MSME Development Act 2006 would only be tax-deductible upon actual payment.

Non-compliance within this timeframe results in tax liabilities for businesses.

MSMEs have expressed concerns that this provision may incentivise larger buyers to prefer unregistered enterprises to avoid compliance. The Supreme Court recently rejected a plea challenging this section of the Income Tax Act.

Sources indicate that the government is considering several options. These include extending the payment period to 60 days, revoking the Income Tax Act amendment, or allowing businesses to make payments by the due date to qualify for tax deductions.

While the government's intent was to promote timely payments to MSMEs, the measure has reportedly discouraged purchases from these enterprises due to concerns over tax deduction eligibility.

Industry experts suggest aligning the provision with existing trade norms and other regulatory frameworks. Vivek Jalan, Chairman, National Fiscal Affairs and Taxation Committee at the Bengal Chamber of Commerce and Industry, recommends harmonising Section 43B(h) with the CGST Act's 180-day payment provision and extending its applicability to medium-scale enterprises.

Analysts caution that the impact of this clause may vary across MSME sectors and could potentially burden businesses with weaker bargaining power.

They note that while the provision aims to enhance MSMEs' financial health, its success depends on ensuring timely payments from larger entities and minimising compliance burdens.

(KNN Bureau)