New Delhi: The Supreme Court has turned down the micro, small and medium enterprises (MSMEs) plea challenging a rule under the Income Tax Act under which businesses are prohibited from extending credit to buyers beyond 45 days.
It, however, allowed the Federation of All India Vyapar Mandal (FAIVM), the petitioner, to withdraw the plea and challenge it in the high court. The FAIVM had had filed the petition on behalf of the MSMEs in the apex court.
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The MSMEs had challenged the provisions of Section 43B(h) of the Income Tax Act, which aims to regulate credit extension practices among MSMEs, ensuring timely payments and addressing working capital shortages in the sector. As per the laid down provision, MSMEs are deemed to pay penalty in case they fail to adhere to the timeframe for payment. They are also liable to pay compounded interest penalties at three times the bank rate set by the Reserve Bank of India (RBI).
A senior FAIVM functionary said the MSMEs also risk losing the ability to deduct payments made to them from their taxable income. “This provision applies when a business purchases goods or avails services from an enterprise registered under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act),” he said.
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Some MSMEs expressed concerns that this provision might lead larger buyers to bypass small and medium suppliers and instead opt to purchase from unregistered enterprises.
In February, representatives from the traders’ body Confederation of All India Traders (CAIT) met finance minister Nirmala Sitharaman, requesting a one-year postponement of the clause’s implementation until April 2025. CAIT, in the memorandum to the finance ministry, expressed support for the government’s decision, emphasizing the importance of ensuring timely payments to the MSME sector within 45 days to maintain uninterrupted cash flow for traders.
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The CAIT had, however, urged the government to suspend the implementation of the clause until sufficient clarification and nationwide dissemination of information could be achieved. The confederation had claimed that the law “lacked clarity” regarding its to traders and other related provisions.
