The Finance Act 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro, Small and Medium Enterprises (MSME) for goods supplied or services given may be deducted in the same year if it is paid within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
This amendment aims to address the issue of working capital scarcity in the MSME industry and promote prompt payments to micro and small businesses. The assessment year 2024–2025 and any following years will be covered by this change, which will come into effect on April 1, 2024.
MSME Section 43B (h): New MSME 45 Days Payment Rule
The newly added clause (h) states that any sum payable by the assessee to a MSME beyond the time limit set in Section 15 of the MSMED Act, 2006, is eligible for deduction.
This deduction is applicable in the previous year when the sum is actually paid. Clause (h) of Section 45B essentially states that any sum payable by a larger enterprise or entity to a registered MSME beyond the stipulated deadlines won’t be considered a deductible expense in the year the liability was incurred.
Section 43B (h) Applicability
This clause is applicable when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006, is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2024.
Section 43B (h) Applicability on Traders
As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.
Section 43B (h) Effective Date
The applicability of clause (h) of Section 43B is from April 1, 2024. This amendment is made applicable from assessment year (AY) 2024-25, that is, Financial Year (FY) 2023-24.
Section 43B (h) Time Limit
Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
Example of Section 43B (h)
Sr. No. | Day of acceptance of any goods or services by a buyer from a supplier | Credit period (Days) | Actual date of payment | Deduction allowed in which FY |
1 | 29/03/2024 | 60 | 25/05/2024 | FY 2024-25 |
2 | 01/04/2024 | 45 | 21/05/2024 | FY 2024-25 |
3 | 31/01/2024 | 15 | 20/02/2024 | FY 2023-24 |
4 | 11/09/2023 | 20 | 03/10/2023 | FY 2023-24 |
5 | 30/11/2023 | 30 | 20/12/2023 | FY 2023-24 |
6 | 21/04/2024 | 40 | 20/06/2024 | FY 2024-25 |
7 | 15/12/2023 | – | 05/04/2024 | FY 2024-25 |
8 | 10/11/2023 | – | 30/11/2023 | FY 2023-24 |
Penalties for Failure to Pay MSMEs Within the Time Frame
In the case of late payment to an MSME, interest is applicable.
Rate of interest: Compound interest at the times of the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is payable: Appointed day or the date as per the agreement, as the case may be.
Deduction of this interest is not allowed as an expense, as per the Income-Tax Act (ITA), 1961.
Benefits of Clause (h) of Section 43B
Benefits for MSMEs:
Smooth Payment Cycle: MSME Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is 15 days without a written agreement and 45 days with an agreement. This way, MSMEs are assured of timely cash flow, which is essential for their sustainability and growth.
Better Bargaining Power: The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities. It is possible for them to confidently push for deadlines aligned with the stipulated time frame, as they remain assured of consequences in case of delayed payments.
Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues, are minimised. Thus saving time and resources for both MSMEs and larger businesses alike.
Benefits for Larger Enterprises:
Tax Planning: While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities.
Compliance and Transparency: Income-Tax Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
Strong MSME Ecosystem: Ensuring prompt payments to MSMEs provides a fillip to a robust MSME ecosystem. In the bargain, benefiting larger entities through a vibrant supply chain and ease of access to various resources.
Frequently Asked Questions
What does Section 43B(h) cover?
The newly added clause (h) in Section 43B specifically covers any sum payable by the assessee to a micro or small enterprise. The amendment is introduced to ensure timely payments to such enterprises within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The payments that go beyond the specified time limit under Section 15 of the MSMED Act are covered under this clause and are allowed as deductions only upon actual payment.
Who is affected by Section 43B(h)?
Businesses that deal with Micro, Small and Medium Enterprises (MSMEs) will need to be more diligent in tracking and ensuring timely payments to these entities. Since deductions for delayed payments to micro and small enterprises can only be claimed upon actual payment, businesses may need to adjust their accounting and tax planning practices.
This would include potentially revising their cash flow management to accommodate timely payments or facing the tax implications of delayed payments. The amendment highlights the importance of adhering to the payment timelines specified under the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006, to avail of tax deductions efficiently.
Furthermore, the tax auditor shall be required to report unpaid dues to micro and small enterprises in Form 3CD of the Tax Audit Report. The assessee shall be required to add back to its total income the disallowance reported in Form 3CD of its Tax Audit Report. Accordingly, such assesse will be required to file its Income Tax Return (ITR), failing which the income-tax department through the Centralised Processing Centre (CPC), Bengaluru, shall add back the disallowance and recompute tax liability while processing the ITR.
What is the timeframe for payments under Section 43B(h)?
Large enterprises or entities are obligated to pay Micro, Small and Medium Enterprises (MSMEs) within 45 days, depending on the presence of a written agreement. In the absence of a written agreement, payment is required to be made within 15 days. If there is a written agreement, payment shall be made as per the agreed-upon timeline, but not exceeding 45 days.
How to ensure compliance with Section 43B(h)?
Adhering to Section 43B(h) requires enterprises or entities to adjust their payment processes and ensure they have the necessary documentation and systems in place to verify MSME registration status and track payment deadlines accurately.
Due diligence in terms of awareness and understanding of these requirements is fundamental to navigating the compliance landscape successfully.
Section 43B(h) of the Income-Tax Act (ITA), 1961, introduces a significant compliance challenge for entities. However, with a clear understanding of the provision and a proactive approach to managing vendor payments, enterprises can navigate these requirements successfully. The provision, while contentious, highlights the significance of supporting the MSME sector, a critical component of the Indian economy. With further clarifications emerging from the government, businesses should keep themselves informed and adaptable to remain compliant and ensure positive vendor relationships.
Are there any penalties for non-compliance with Section 43B(h)?
In case outstanding payments are not made within the prescribed time limit, which cannot exceed 45 days, then that outstanding payable amount shall be added to the taxable income of the taxpayer. The taxpayer has to bear the income-tax liability on the respective outstanding amount. The assessee gets a deduction in the previous year where payments is made.
In case the business enterprise does not make payments to Micro, Small and Medium Enterprises (MSME) in the above prescribed period, then it has to make payment of compound interest at monthly interests to the supplier at three times bank interest as same is notified by the Reserve Bank of India (RBI).
Can payments made after the due date be carried forward for deduction?
Payments that go beyond the specified time limit under Section 15 of the Micro, Small and Medium Enterprise Development (MSMED) Act. 2006, are covered under clause (h) of Section 43B and are allowed as deductions only upon ‘actual payment’.
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