Finance Minister Nirmala Sitharaman on May 28 hinted at the possibility of the government reconsidering changes made to the income tax rules mandating payments to micro, small and medium enterprises (MSMEs) within 45 days, failing which companies will have to pay tax on the amount due. This mandate came into effect on April 1, 2024.

She urged MSMEs to send representations on the same, adding that the government will "surely do something about it in the July Budget".

Speaking at an event in Ludhiana, Punjab, Sitharaman said the changes mandating the 45-day payment window was introduced as per requests from MSMEs themselves.

"The change in income tax Act did not come this year, it came in 2023, if you want to change it then when the new government comes in the July Budget something can be done depending on the representations that are submitted. But we have changed the income tax act as per requests from MSMEs themselves. Request was payment was not happening in 45 days. But even if MSMEs don't want this rule then it gets easier to change it and go back to the original one", she said.

The rules were tweaked through an amendment to the Income Tax Act 2023 by adding a clause (h) to Section 43B, essentially barring businesses from claiming tax deductions for payments beyond 45 days from MSMEs for supply of goods and services This was done to motivate larger entities to prioritize their settlements with MSME counterparts, thereby helping smaller businesses tide over any cash crunch.

The finance minister's indication on potentially relaxing the 45-day payment rule for MSMEs comes after stakeholders allegedly highlighting how the severity and lack of clarity surrounding the mandate could disrupt established business practices and trade. Sitharaman also clarified that tax benefits will continue to be available to MSMEs. Though companies risk tax benefits in a particular financial year when payment is not made within the 45-day window, potentially losing out on deductions.