In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman has addressed the contentious 45-day payment rule that affects micro, small, and medium enterprises (MSMEs). This rule mandates that traders must settle bills with MSMEs within 45 days to qualify for certain tax deductions. To mitigate the adverse effects of this rule on MSMEs, the government has announced a new fund in collaboration with banks aimed at providing financial relief to cash-strapped MSMEs facing payment delays.
Key Points:
Introduction of New Fund for MSMEs:
The government has partnered with banks to create a new fund designed to offer financial assistance to MSMEs experiencing delays in payment from their clients. This initiative seeks to alleviate the financial stress that MSMEs often endure due to delayed payments, ensuring they have access to necessary working capital.
45-Day Payment Rule:
The rule, under Section 43B(h) of the Income Tax Act 1961, introduced in the Finance Act 2023, stipulates that companies must pay MSMEs within 45 days of the purchase to claim deductions on their taxes. This provision, effective from April 1, 2024, aims to ensure timely payments to MSMEs. However, it has raised significant concerns among MSME associations. They fear potential contract cancellations and an additional tax burden on suppliers if the payments are delayed.
Budget Initiatives for MSMEs:
While the Union Budget 2024-25 introduced several supportive measures for MSMEs, it did not revise the 45-day payment rule. This has left many MSMEs anxious about its long-term impact. There is a concern that larger companies might avoid doing business with MSMEs to circumvent the rule, which could lead to reduced opportunities and financial instability for smaller enterprises.
Anusandhan National Research Fund:
Another significant announcement in the budget was the establishment of the Anusandhan National Research Fund, with an allocation of Rs 1 lakh crore. This fund is intended to bolster private sector-driven research and innovation, particularly in critical sectors such as agriculture. This initiative aims to promote R&D and drive technological advancements that can benefit the broader economy.
Role of Bengaluru in Digital Public Infrastructure:
The budget also emphasized Bengaluru’s key role in expanding digital public infrastructure. The city is poised to be at the forefront of efforts to make digital payments ubiquitous across various sectors. This focus aligns with the broader goal of enhancing the digital economy and improving the ease of doing business through technology.
Analysis:
The introduction of the new fund is a crucial step towards providing MSMEs with a financial safety net against the backdrop of the stringent 45-day payment rule. The fund’s availability can help MSMEs manage their cash flows more effectively, reducing the immediate pressure caused by payment delays. However, the government’s decision to maintain the 45-day payment rule without any changes has raised alarms within the MSME community. Many fear that larger companies may shift their sourcing to non-MSME vendors or pressure MSMEs to forgo their registration to avoid the constraints imposed by the rule.
Moreover, the emphasis on research, innovation, and digital infrastructure in the budget highlights the government’s commitment to fostering a more resilient and advanced economy. The establishment of the Anusandhan National Research Fund and the recognition of Bengaluru’s role in digital infrastructure are forward-looking measures aimed at driving growth in key sectors. These initiatives are expected to create a more conducive environment for innovation and technological advancements, which are essential for sustaining long-term economic growth.
Conclusion:
The Union Budget 2024-25 presents a mixed scenario for MSMEs. While the introduction of a new fund provides much-needed financial relief, the decision to keep the 45-day payment rule unchanged poses significant challenges. This rule, although well-intentioned to ensure timely payments, may inadvertently lead to negative consequences such as contract cancellations and increased tax burdens for MSMEs. The focus on research, innovation, and digital infrastructure, however, reflects a strategic approach towards building a robust and future-ready economy. Overall, the budget underscores the government’s intent to support MSMEs while also promoting broader economic development through technological and research-driven initiatives.
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