The MSME Payment Rule, established under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, serves as a regulatory framework to address the persistent issue of delayed payments encountered by Micro, Small, and Medium Enterprises (MSMEs). This rule mandates timely payment to MSMEs by buyers for goods or services rendered, aiming to enhance their financial stability and spur economic growth.
Key features of Budget 2025-26 for MSMEs (February 2025)
The Union Budget for 2025-26 introduces key initiatives to support Micro, Small, and Medium Enterprises (MSMEs) and foster their growth:
Updated investment and turnover limits: The investment and turnover thresholds for MSMEs will be revised, with investment limits increasing by 2.5 times and turnover limits by 2 times.
Updated limits for different enterprise types
Enterprise type |
New investment limit |
New turnover limit |
Micro enterprises |
From Rs. 1 crore to Rs. 2.5 crore |
From Rs. 5 crore to Rs. 10 crore |
Small enterprises |
From Rs. 10 crore to Rs. 25 crore |
From Rs. 50 crore to Rs. 100 crore |
Medium enterprises |
From Rs. 50 crore to Rs. 125 crore |
From Rs. 250 crore to Rs. 500 crore |
- Credit guarantee for MSMEs: The credit guarantee cover for micro and small enterprises will increase from Rs. 5 crore to Rs. 10 crore, enabling an additional Rs. 1.5 lakh crore in credit over the next 5 years
- Startups: The credit guarantee cover for startups will rise from Rs. 10 crore to Rs. 20 crore, with a reduced 1% guarantee fee for loans in 27 priority sectors under Atma Nirbhar Bharat
- Exporter MSMEs: The term loan guarantee cover for established exporters will increase to Rs. 20 crore
Additional measures for MSMEs in budget 2025
- Credit cards for micro enterprises: Tailored credit cards with a limit of Rs. 5 lakh will be issued to micro enterprises registered on the Udyam portal, with a goal of issuing 10 lakh cards in the first year
- Startup fund of funds: The Alternative Investment Funds (AIFs) for startups, totaling Rs. 91,000 crore, will receive additional support of Rs. 10,000 crore to expand their scope
- Support for first-time entrepreneurs: A new initiative will offer term loans of up to Rs. 2 crore over the next five years to 5 lakh first-time entrepreneurs, including women, SCs, and STs
What is the scope of the MSME payment rule?
The scope of the MSME Payment Rule encompasses all transactions involving MSMEs, irrespective of whether they are with public or private sector entities. It extends to various business arrangements, including supply contracts, subcontracting agreements, and service provision, ensuring comprehensive coverage across different sectors and industries.
What are the objectives of MSME payment rule?
The primary objectives of the MSME Payment Rule revolve around promoting financial inclusivity, fostering a conducive business environment for MSMEs, and catalysing their growth and development. By ensuring prompt payment to MSMEs, the rule aims to mitigate cash flow challenges, enhance operational efficiency, and encourage greater participation of MSMEs in economic activities.
Key components of the MSME payment rule
The key components of the MSME Payment Rule encompass several critical aspects, including:
- Definition of MSMEs: Clearly defining the criteria for identifying MSMEs eligible for protection under the rule.
- Prescribed payment timelines: Specifying the maximum permissible credit period within which buyers must settle dues to MSMEs.
- Consequences for non-compliance: Outlining penalties, interest charges, or other punitive measures for buyers failing to adhere to payment timelines.
- Grievance redressal mechanisms: Establishing effective mechanisms for MSMEs to seek recourse in case of payment delays or disputes.
- Stakeholder awareness programs: Conducting awareness campaigns and training sessions to educate buyers and MSMEs about their rights and obligations under the rule.
Benefits of the MSME payment rule
The MSME Payment Rule offers a myriad of benefits for both MSMEs and the broader economy, including:
- Timely receipt of payments: Ensures MSMEs receive payments promptly, improving their cash flow and financial stability.
- Enhanced operational efficiency: Facilitates smoother business operations by reducing uncertainties associated with payment delays.
- Increased business confidence: Builds trust and confidence among MSMEs, fostering stronger business relationships with buyers.
- Stimulated economic growth: Promotes MSME growth and expansion, driving job creation, innovation, and overall economic development.
Challenges and concerns of MSME payment rule
Despite its merits, the MSME Payment Rule faces certain challenges and concerns, such as:
- Lack of awareness: Many MSMEs and buyers may be unaware of their rights and obligations under the rule, leading to non-compliance.
- Enforcement issues: Inadequate enforcement mechanisms and delays in grievance redressal may undermine the effectiveness of the rule.
- Dispute resolution complexity: Resolving disputes related to payment delays or discrepancies can be time-consuming and resource-intensive, affecting business operations.
- Impact on business relationships: Strict enforcement of payment timelines may strain relationships between buyers and MSMEs, affecting future collaboration opportunities.
Steps to ensure compliance with the rule
To ensure compliance with the MSME Payment Rule, stakeholders can take several proactive steps, including:
- Maintain accurate records: Maintain comprehensive records of transactions with MSMEs, documenting payment terms and timelines.
- Adhere to prescribed timelines: Honour payment deadlines stipulated under the rule, avoiding unnecessary delays or disputes.
- Implement robust monitoring systems: Deploy robust systems for monitoring payment status and tracking payment processing to identify and address delays promptly.
- Promptly address discrepancies: Address any discrepancies or disputes related to payments promptly, engaging in constructive dialogue with MSME partners to resolve issues amicably.
- Participate in awareness programs: Participate in awareness programs and training sessions organised by relevant authorities to stay informed about compliance requirements and best practices.
What is Section 43B(h)?
Section 43B(h) of the Income Tax Act mandates that companies must make payments to MSME vendors within 45 days to claim deductions. If payments are not made within this timeframe, companies forfeit the right to deduct those expenses from their taxable income. This provision aims to ensure timely payments to MSMEs and encourages compliance with payment deadlines to avoid financial penalties and taxation implications.
Section 43B(h) explained
Section 43B(h) of the Income Tax Act requires companies to settle payments to MSME vendors within 45 days to qualify for deductions. Failure to meet this deadline results in companies losing the ability to deduct those expenses from their taxable income. This provision underscores the importance of timely payments to MSMEs and serves as a mechanism to incentivize adherence to payment timelines. By enforcing prompt payments, the provision aims to support the financial health of MSMEs and promote fair business practices in the corporate sector.
The 45-Day MSME payment rule: Explained
The 45-Day MSME payment rule significantly benefits MSMEs by ensuring they receive timely payments for their goods and services. By mandating buyers to settle dues within 45 days of accepting goods or services, the rule helps MSMEs maintain steady cash flow and financial stability.
Failure to do pay the MSME within 45 days results in companies being unable to claim deductions. Essentially, if payments are not made within the specified timeframe, companies lose the benefit of deducting those expenses from their taxable income. Consequently, the buyer is liable to pay taxes on the overdue amount.
How 45-Day MSME payment rule impacts small businesses
The 45-Day MSME Payment Rule has a profound impact on small businesses, offering several advantages:
- Improved Cash Flow: Accelerates cash flow for MSMEs, enabling them to meet operational expenses, invest in growth initiatives, and expand their business operations.
- Reduced Financial Stress: Alleviates financial stress and uncertainty associated with delayed payments, providing MSMEs with greater financial stability and resilience.
- Enhanced Business Confidence: Instils confidence among MSMEs, fostering
In the context of the MSME Payment Rule, business loans can serve as a valuable financial tool for MSMEs to bridge cash flow gaps resulting from delayed payments. By accessing timely funds through a business loan, MSMEs can ensure continuity of operations, meet operational expenses, and sustain business growth initiatives despite payment delays. Additionally, business loans offer flexibility in terms of repayment schedules and loan amounts, enabling MSMEs to tailor their borrowing according to their specific financial needs and constraints. Whether it's covering immediate expenses, investing in productivity-enhancing technologies, or diversifying revenue streams, business loans provide MSMEs with the necessary financial support to navigate challenges effectively and seize growth opportunities in the dynamic business landscape.
