According to the Income-tax Act, the deduction of expenses is typically based on the accounting method followed by the assessee. However, Section 43B outlines certain expenses that are deductible only on a payment basis, irrespective of the accounting method. The Finance Act of 2023 introduced a new clause (h) to Section 43B, emphasizing timely payments to Micro and Small Enterprises (MSEs). This amendment, viewed as a Socio-Economic Welfare Measure, aims to address working capital shortages in the MSE sector by promoting prompt payments.
The Law and Analysis:
Section 43B(h) stipulates those payments to MSEs must adhere to the time limits specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
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 Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed).
Applicability of Section 43B(h)
Section 43B(h) applies when an enterprise purchases goods or services from a supplier registered under the MSMED Act, 2006. Importantly, the buyer’s registration under the MSMED Act is not required for this clause to apply. This provision, which encourages prompt payment to registered micro and small enterprises, will take effect on April 1, 2024. This ensures that the benefits of Section 43B(h) are available as long as the supplier is registered under the MSMED Act.
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.
Example: Mr. A purchased Goods from Mr. B. Mr.B is a trader. Is section 43B(h) applicable?
No, section 43B(h) is not applicable as the supplier is a trader. It is applicable to Manufacturing and services Providers Only.
Benefits of Clause (h) of Section 43B for MSMEs
- Smooth Payment Cycle: Section 43B(h) encourages large companies to settle their dues with MSMEs within the specified timeframe: 15 days without a written agreement and 45 days with an agreement. This ensures that MSMEs receive timely payments, which are crucial for maintaining their cash flow, sustainability, and growth.
- Better Bargaining Power: With the enforcement of this provision, MSMEs can negotiate payment terms with larger entities more confidently. Knowing that delayed payments have tangible consequences bolsters their negotiation position.
- Reduced Disputes: Timely payments lead to fewer disputes and legal issues related to outstanding dues. This reduction in conflict saves time and resources for both MSMEs and larger businesses, fostering a more harmonious business environment.
Effective Date of Section 43B(h) for MSME Payments
Section 43B(h), introduced in the Finance Act, takes effect from April 1, 2024. This means the amendment applies from the assessment year (AY) 2024-25, corresponding to the financial year (FY) 2023-24.
Example: Mr. A purchased goods from Mr. B on March 31, 2023. Is Section 43B(h) applicable?
No, Section 43B(h) does not apply to purchases made before March 31, 2023. The provision only affects payments for goods and services from April 1, 2024.
Payment Time Limits Under Section 43B(h) for MSMEs
Under Section 43B(h), business enterprises must adhere to specific payment timelines to MSMEs as dictated by Section 15 of the MSMED Act, 2006. These payment terms are contingent on a written agreement between the buyer and the supplier.
- No Written Agreement: If there is no written agreement specifying the payment terms, the business enterprise must pay within 15 days of purchasing goods or services from an MSME.
- With Written Agreement: If there is a written agreement, payments should be made according to the timeline specified in the agreement, provided that this period does not exceed 45 days from the date of acceptance or deemed acceptance of the goods or services.
Here is the structured information about payment timelines for MSMEs under Section 15 of the MSMED Act, presented in tabular format :
Scenario Timelines for Payment Details Payment timelines specified under an agreement Payment should be made within the earlier of the following dates: a) Due date specified in the agreement This is the date the buyer and MSE agreed upon for making the payment. b) 45 days from the ‘day of acceptance’ The ‘day of acceptance’ is when the goods are delivered or the services are rendered. Note: If the buyer objects in writing within 15 days of the delivery or rendering of services, the ‘day of acceptance’ is adjusted to the day when the MSE resolves the objection. Payment timelines not specified under an agreement Payment should be made within 15 days from the ‘day of acceptance’. The ‘day of acceptance’ is when the goods are delivered or the services are completed. Note: If the buyer writes an objection to the goods or services within 15 days, the MSE resolves the objection on the ‘day of acceptance’.
Penalties For Failure To Pay MSMEs
In the case of late payment to an MSME, interest is applicable.
Rate of interest: Compound interest at the 3 times the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is payable: The date as per the agreement or the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier (appointed day), as the case may be.
The deduction of this interest is not allowed as an expense, as per the Income-tax Act (ITA), 1961.
FAQs
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.