Amendment in section 43B – Allowance of expenses on payment basis to micro or small enterprises

Introduction:

Finance Minister Smt. Nirmala Sitharaman has proposed amendment for providing benefit to micro and small enterprises which might result into being a big task for Indian enterprises.

Speech: “to support MSMEs in timely receipt of payments, I propose to allow deduction for expenditure incurred on payments made to them only when payment is actually made.”’

Proposed amendment:

To promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Income Tax Act, 1961 (“the Act”). Thus, a deduction for such payments would be allowed only when they are actually paid. It will be allowed on an accrual basis only if the payment is within the time mandated under section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006).

Section 43B of the Income Tax Act:

Section 43B of the Income Tax Act, 1961 allows deduction in respect of certain expenditure only when the sum is actually paid by the Assessee. However, it also states that deduction shall be allowed if such amount has been actually paid by the Assessee on or before the due date of his Income Tax Return.

After the proposed amendment, clause h is being inserted which states, “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,”

The proviso has also been amended to exclude proposed clause “(h)” from allowance in case payment made to MSE on or before the due date of filing of Income Tax Return u/s 139 of the Act.

Section 15 of MSMED Act:

Section 15 of the MSMED Act deals with the liability of a buyer to make payment. It states that the buyer must pay to MSE vendor within 15 days of delivery of goods or provision of services in the absence of a written agreement.

If there is a written agreement in relation to payments terms between the parties, the payment terms cannot be stipulated in excess of 45 days. Therefore, even if the parties agree to payment terms of more than 45 days, the law mandates to pay within 45 days only.

Difficulty in implementation:

Since the Finance Bill proposes to deny deduction of payment made after the due dates of MSMED Act, it would cause problems in the Ease of doing Business. Further, even if the payment has been made on or before the due date of filing of Income Tax Return, which is generally allowed under section 43B, the same shall not be allowed unless the payment has been made in accordance with section 15 of the MSMED Act.

As per the finance bill, it can be understood that the payment outstanding as on 31^st March shall be considered for disallowance if the payment has not been made in accordance with the MSMED Act. Any payment made after the due date as prescribed under MSMED Act, shall be disallowed. Concerns have also been raised about the applicability of amendment to provisions made on year end on accrual basis. The amendment may be interpreted to exclude year-end provisions from the ambit of this section since the supply of services falls next year.

A clarification may be issued by the department for clarifying the above concerns. 

Other provisions related to MSME:

• The Income Tax Act mandates to disallow the Interest expense against payment to micro and small enterprises beyond due dates as mentioned in section 15 of the MSMED Act.
• The Companies Act mandates separate disclosure of outstanding balance and interest thereon due to MSE in the financial statements.
• GST provisions mandate payments to vendors (MSE or not) within 180 days. If the payment is not made within 180 days, the Input tax credit is required be reversed along with applicable interest.