New Delhi: The government is contemplating to relax the requirement for making payments to MSMEs within 45 days of purchasing goods and services to prevent large corporations from seeking alternative sourcing options, media reported.

An announcement about this change could be made in the Budget expected on July 23, news agency PTI reported.

This consideration comes in response to suggestions from MSMEs during pre-Budget consultations about amending Section 43B(h) of the Income Tax Act.

Last year’s Budget introduced a clause under Section 43B to address the issue of delayed payments to MSMEs.

Section 43B(h) of the Income Tax Act, introduced through the Finance Act 2023, requires that if a large company is unable to pay an MSME within 45 days (as per written agreements), it cannot deduct that expense from its taxable income, resulting in potentially higher taxes, according to the report.

MSMEs are concerned that this provision might lead large buyers to avoid MSME suppliers and instead purchase from non-registered MSMEs or non-MSMEs.

While the amendment aims to ensure timely payments to MSMEs, there are fears that large corporations might shift their sourcing to bigger firms or pressure vendors to drop their MSME registration, it said.

In May, Finance Minister Nirmala Sitharaman mentioned that any changes to this rule would need to be addressed in the full Budget in July, based on MSME representations.

The MSME sector contributes 30% to the country’s GDP and is the second-largest employer after agriculture. MSME-specified products account for 45.56% of the country’s total exports.