New Section 43B(h) of the Income Tax Act – Make On time Payments to MSMEs and Reduce Tax Liability

Section 43B (Income Tax Act 1961) : Section 43B Deals with Certain deductions to be only on actual payment. New Clause (h) is added to this section to ensure timely payments to Micro and Small Enterprises (MSMEs) with effect from April 1, 2023 (FY 2023-24 & AY 2024-25).

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

So basically, this section imposes disallowances for delayed payments of purchases made from Micro and Small Enterprises, Disallowance of Expense means increasing taxable Income resulting in to increase in the Tax Liability of the assessee.

It is applicable to all types of purchases made from enterprises registered under the MSMED Act, 2006.

However, it specifically applies to Micro and Small Enterprises, excluding Medium Scale Enterprises.

What Section 43B(h) mean to say:

Section 43B(h) states that,

-Any sum payable by the assessee

-to a Micro & Small Enterprise

-Should be paid within the time limit specified in Section 15 of the MSMED Act.

-to take deduction in the previous year in which such purchase has occurred.

-otherwise it shall be allowed only in computing the income of the previous year in which the sum has been actually paid.

This is irrespective of the previous year in which the liability to pay the sum was incurred, as per the accounting method regularly employed.

To whom Clause (h) of Section 43B is Applicability?

-When an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. and such enterprise is Micro and Small Enterprise.

-Buyer may or may not be registered under the MSMED Act, 2006.

Clause (h) of Section 43B comes into effect from April 1, 2023.

What is Micro & Small Enterprises?

Micro Enterprises:

have an investment in plant & machinery not exceeding 1 Crore and

turnover not exceeding 5 Crores.

Small Enterprises:

investment in plant & machinery not exceeding 10 Crores and

turnover not exceeding 50 Crores.

Medium Enterprises:

investment in plant & machinery not exceeding 20 Crores and

turnover not exceeding 100 Crores.

Within how many days payment should be made?

- If agreement is made for payment period :

Period mentioned in the agreement (Maximum 45 days)

- If No Agreement :

15 days.

How non payment within time limit affects taxable income?

1. The non paid amount becomes taxable income for the assessee in the previous year of non-payment.

2. The assessee can claim a deduction in the previous year when the payment is made.

3. Non-compliance can result in compound interest obligations to the supplier at three times the RBI-notified Bank Interest.

No deduction of Interest Expense

Interest incurred for delayed payment to Micro & Small Enterprises is considered penal interest and is not allowed under Section 37 of the Income Tax Act.

Enterprise is obligated to pay compound interest at monthly rests even if not demanded by the supplier.

Practical Example:

Sr No	Date of pur	FY in which pur?	Agreement ?	No of days as per MSME	Date of payment	No of days taken for Payment	Is it paid within Time limit	Deduction in FY	Interest Payable?
1	01-04-2023	2023-24	NO	15	14-04-2023	14	YES	2023-24	NO
2	01-04-2023	2023-24	NO	15	30-04-2023	30	NO	2023-24	YES
							But paid in the FY 2023-24
3	29-03-2024	2023-24	YES(20)	20	07-04-2024	10	YES	2023-24	NO
4	29-03-2024	2023-24	YES(20)	20	27-04-2024	30	NO	2024-25	YES
5	25-03-2024	2023-24	YES(60)	45	24-05-2024	60	NO	2024-25	YES
							As per MSME only 45 days allowed

However, Interest is payable:

Compound interest at three times the RBI Bank Rate from the due date till the payment date. This interest expense is disallowed while computing income under the PGBP head.

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.

Conclusion:

Section 43B(h) emphasizes the timely payment obligations to Micro & Small Enterprises.

Non-compliance may result in disallowances resulting increase in taxable income incurring additional compound interest obligations again not deductible.

For healthy and compliant environment within the MSME sector, one must understand and make timely payments.

Disclaimer:- The opinions presented are exclusively those of the author CA Pratibha Varia. The material in this piece is intended purely for informational purposes and for individual, non-commercial consumption. It does not constitute expert guidance or an endorsement by any organization. The author, the organization, and its associates are not liable for any form of loss or harm resulting from the information in this article, nor for any decisions made based on it. Furthermore, no segment of this article or newsletter should be employed for any intention unless granted in written form, and we maintain the legal right to address any unauthorized utilization of our article or newsletter.