Pay to MSME Suppliers on Time, Don’t Be April Fooled!!

Summary: A new MCA notification mandates companies to report delayed payments to Micro and Small Enterprises (MSEs) every six months if they exceed 45 days. Under Section 15 of the MSME Development Act, 2006, payments must be made within 15 days if no written agreement exists or within 45 days if agreed upon. Section 43B(h) of the Income Tax Act, effective April 1, 2024, disallows tax deductions on overdue payments until settled, impacting business tax liability and cash flow. Companies must report all MSE payments in Tax Audit Form 3CD. Non-compliance can lead to penalties and increased tax burdens. To comply, businesses should identify MSE vendors, track payment deadlines, and ensure timely payments to avoid financial and legal risks.

Arjuna (Fictional Character): Krishna, I heard there’s a new rule about MSE payments. What is it about?

Krishna (Fictional Character): Yes, Arjun. The Ministry of Corporate Affairs (MCA) issued notification no S.O. 1376(E) on March 25, 2025. If a company buys goods or services from a Micro or Small Enterprise (MSE) and doesn’t pay within 45 days, they now need to report it to the MCA every six months. First, let us understand the new classification of MSME.

Arjuna (Fictional Character): Why is this being implemented now?

Krishna (Fictional Character): Many small businesses struggle with delayed payments, which disrupts their cash flow. To address this, the new rule ensures that companies make timely payments and increases accountability. If a company takes more than 45 days to pay an MSE supplier, they must officially report it to the MCA every six months.

Additionally, under Section 15 of the MSME Development Act, 2006, payment terms to MSE depend on whether there is a written agreement:

• Without a written agreement, payments must be made within 15 days of receiving goods or services.
• With a written agreement, the payment period can be extended but cannot exceed 45 days.

Arjuna (Fictional Character): But does this apply to all businesses?

Krishna (Fictional Character): No, it only applies to companies buying from registered Micro and Small Enterprises under the MSME Development Act, 2006. If your Goods & Service supplier is a registered MSE, then you must follow this rule.

Arjuna (Fictional Character): And what happens if companies fail to follow this rule?

Krishna (Fictional Character): Well, non-compliance can lead to penalties and legal trouble in the future.

Arjuna (Fictional Character): Krishna, is there any disclosure requirement about payments to MSE in 3CD. Can you explain this?

Krishna (Fictional Character): Yes, Arjuna from this year, businesses need to report all the payments made to Micro and Small Enterprises (MSEs) in Tax Audit Form 3CD under Clause 22.

Arjuna (Fictional Character): Do, businesses still need to mention payments even if they’re made on time?

Krishna: Yes! You’ll need to report the total dues to SME’s even if paid within time, including any interest paid or payable, in Form 3CD.

Also, under Section 43B(h) of the Income Tax Act, any payment due to an MSE beyond 45 days with written agreement or 15 days without written agreement cannot be claimed as an expense deduction until it is actually paid. This can increase your taxable income and your tax liability.

Arjuna (Fictional Character): When was this Section 43B(h) introduced?

Krishna (Fictional Character): It was introduced in the Finance Act 2023 and became effective from April 1, 2024. The goal was to encourage timely payments to MSEs by restricting the tax benefit of delayed payments.

Arjuna (Fictional Character): How exactly does Section 43B(h) impact businesses?

Krishna (Fictional Character): This section affects your business in two ways:

1. Tax Disallowance: If you don’t pay your MSE supplier within 45 days, you cannot claim that expense as a deduction while calculating taxable income in that financial year. This means you might have to pay higher taxes.

2. Cash Flow Planning: Since delayed payments won’t reduce your taxable income, you might have to make advance tax payments on a higher income figure, affecting your business cash flow.

Arjuna (Fictional Character): Oh, that could create unnecessary tax burdens for businesses! What should I do to avoid this?

Krishna (Fictional Character): To ensure compliance and avoid tax issues:

1. Identify your MSE suppliers – Check if your vendors are registered under the MSME Development Act, 2006.

2. Track payment deadlines – Ensure payments are cleared within given time limit of section 15 of MSME Development Act, 2006 .

3. Plan cash flow accordingly – Set aside funds for timely payments to avoid tax disallowance

4. Consult with your CA – Stay updated on tax laws and compliance requirements.

Arjuna (Fictional Character): what exactly do I need to report to the MCA in the half-yearly compliance report?

Krishna (Fictional Character): In the half-yearly compliance report, you need to provide:

• Total outstanding amount due to MSE suppliers beyond 45 days.
• Reasons for the delay in making payments.

Arjuna (Fictional Character): Krishna, what one should learn from this?

Krishna (Fictional Character): Simple—pay your MSE suppliers on time and track your compliance requirements. This will not only help you avoid penalties but also improve your business relationships and cash flow. Remember, staying compliant isn’t just about avoiding penalties—it also helps build strong relationships with suppliers and keeps your business financially healthy.