CHANGES IN SECTION 43B OF THE INCOME TAX ACT
The Hon’ble Finance Minister Smt. Nirmala Sitharaman has announced various measures for MSME. To assure on-time payments, the stated clause would have been inserted as a Socio-Economic Welfare Measure and has been realized through the Micro and small companies. Section 43B of the Act furnishes for specific deductions to be permitted on real payments only rather than on an accrual basis.
Sec 43B of the Income Tax Act of 1961 is proposed to be amended in 13 clauses of the Finance Bill 2023 to disallow a deduction for transactions with Micro and Small Enterprises where timely payments are not made that is, a new addition to disallowance has been introduced and it is made being vided Sec-43B (h) to disallow expenditures which are supplied or procured from a Micro or Small Enterprises and are not paid within the time limit prescribed U/s 15 of MSME Development Act (MSMED) 2006.
These amendments will take effect from 1 April 2024 and will, accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.
Disallowance u/s. 43B of the Act will be attracted in case the supplier is either Micro Enterprise or Small Enterprise. Disallowance u/s. 43B of the Act will not be attracted if the supplier is Medium Enterprise
Now let us understand the Definitions of Micro, Small & Medium Enterprises as per MSMED Act
Micro Enterprise
Investment in Plant & Machinery less than INR 1 crore
Turnover of less than INR 5 crore
Small Enterprise
Investment in Plant & Machinery less than INR 10 crore
Turnover of less than INR 50 crore
Medium Enterprise
Investment in Plant & Machinery less than INR 50 crore
Turnover of less than INR 250 crore
The above definition is for both Manufacturing Enterprises and Enterprises rendering Services
Sec-15 of MSME Development Act, 2006 is reproduced below:
“Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement on this behalf, before the appointed day”,
Where Appointed day means 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.”
Therefore, if a buyer is entering into an agreement with an MSME supplier, the due date of payment cannot exceed 45 days from the date of actual delivery of goods or rendering of services as the case may be. Where there is no written agreement, the due date will be the 16th day of actual delivery.
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the day of acceptance or the day of deemed acceptance.
ANALYSIS OF THE ABOVE DEFINITION
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- As per the definition of Enterprises, only persons dealing in either Manufacturing of Goods or providing any services will be classified as an Enterprise. Trader / Retailer/ Distributor, etc would not be classified as an Enterprise and would not be covered under the Micro or Small Enterprise Definition.
- As per Sec-15 of MSME Development Act 2006, the due date for an invoice is to be determined as per the Terms of the Invoice or 45 days from the date of the invoice whichever is earlier.
For example- If terms are agreed that payment is due to be made within 75 Days, but still a maximum of 45 Days can be allowable (not beyond that) to make the payment otherwise deduction will not be given in the same Financial year if the Financial year is already the end
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- Supplier under the MSME Development Act 2006 is defined as a person who is registered under the Act, hence Micro or Small Enterprise who are not registered under the Act would not be covered under the Definition of S-43B(h)
Hence, it is advisable to take an MSME registration certificate while dealing with MSME Vendors.
It shall also be noted that there may be a situation where some defect in the goods or deficiency in the provision of service is noticed and the buyer, in this situation, makes an objection, the due date shall be counted from the date when the MSME supplier removes an object. However, the objection is required to be made in writing by the buyer to the supplier.
Let us take one tabular presentation to show what actually this provision means:
Expenses can be claimed only in the year in which expenses are actually paid, unlike other disallowances U/s 43B where disallowance will not be attracted even if the payment is made after the Financial Year but before the due date prescribed u/s 139(1) of the return filing that is the provision of section 43B that allows for a time extension up until the due date of the return would not apply to such payments under any circumstances.
|
Invoice date |
Due Date (within 45 Days) | Paid Date | Amount | Deduction | Disallowance |
| 10-06-2023 | 25-07-2023 | 31-03-2024 | 10,90,000 | FY 23-24 | No Disallowance |
| 10-06-2023 | 25-07-2023 | 05-04-2024 | 10,90,000 | FY 24-25 | FY 23-24 |
| 10-06-2023 | 25-07-2023 | 4,90,000 on 31-12-2023 and remaining on 15-04-2023 | 10,90,000 | FY 23-24- 4,90,000
FY 24-25- 6,00,000 |
FY 23-24- 6,00,000 |
| 01-03-2024 | 15-04-2024 | 20-04-2024 | 10,90,000 | FY 24-25 | FY 23-24 |
| 01-03-2024 | 15-04-2024 | 15-04-2024 | 10,90,000 | FY 23-24 | No Disallowance |
General Note: There may be a situation that an assessor issues a cheque to the MSME supplier and due for some reason; the MSME supplier does not encash it within the due date. In my view, in light of the judgment of the Hon’ble High Court of Punjab and Haryana in the case of CIT vs Hindustan Wire Products Ltd. [2002] disallowance u/s. 43B of the Act should not be attracted.
Conclusion
It can be concluded that:
1) Assesses the need to make payments on a timely basis in order to get a deduction within the same financial year. This will be very beneficial for MSME’s development & promotion.
2) There will be now additional responsibility on Income Tax Auditors to respectfully check Trade creditors outstanding as of 31 March for allowing expense with respect to the MSMED Act 2006 & Income Tax Act 1961.
3) Non-Compliance with these changes will lead to huge taxes on the concerned Assesses, Proper accounting & other various mechanisms are required to adhere to these amendments on a timely basis
4) Clause 10 of the Tax Audit report says Tax Auditor is to report the amount of interest inadmissible u/s 23 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED, Act 2006). As per the said section, any interest for delayed payment to Micro, Small, and Medium Enterprises is not allowed as a deductible expenditure while computing the income of the Assesses under the Income Tax Act, 1961.
5) Any outstanding payment to MSME at end of the year needs disclosure in financials along with interest due.
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About the Author: The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closing businesses in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office in New Delhi.
Author Bio
Payment for Supplies from MSEs become due on deemed acceptance in absence of any objection in writing within 15 days of receipt of goods / services, where the payment is due after receipt and acceptance without any credit period.