Facts for Prelims (FFP)
Source: IE
Context: A new provision in the Income-Tax Act aimed to ensure timely payments to micro, small, and medium enterprises (MSMEs) has led to unintended consequences.
The Finance Act 2023 introduced an amendment to the Income Tax Act, stipulating that payments owed to MSMEs must be resolved within 45 days to qualify for tax deductions.
This applies to transactions involving goods or services from MSMEs registered under the MSMED Act, 2006. Effective from April 1, 2024, the amendment has led to unintended consequences, including large companies shifting orders to unregistered MSMEs (to avoid tax liabilities) and smaller entities surrendering their registration to sustain business operations. Tax experts suggest extending payment timelines to alleviate the issue.
