Summary: Section 43B(h) of the Income Tax Act, introduced by the Finance Bill 2023, requires deductions for payments to micro and small enterprises (MSMEs) to be claimed only when the payment is made, rather than on an accrual basis. This amendment, effective from April 1, 2024, aims to encourage timely payments to MSMEs, aligning with the MSME Development Act, 2006, which stipulates payment deadlines of up to 45 days. The provision is intended to support MSMEs by ensuring they receive timely payments. However, it may inadvertently impose significant tax burdens on larger enterprises unable to meet the new requirements, potentially disrupting the credit cycles and financial stability across industries. This could result in increased tax liabilities, adversely affecting the overall economy and employment. To mitigate these effects, it is suggested that the provision be refined to target only medium and large enterprises and include incentives to promote MSME procurement. This approach could better balance the interests of MSMEs and the broader economic environment.
Introduction
Section 43B(h) was inserted in the Incomer-tax Act by the Finance Bill 2023. As per Memorandum to the Finance Bill 2023 it was introduced as one of the Socio Economic Welfare Measures in the budget 2023.
Section 43B(h) and relevant extracts of Memorandum are reproduced hereunder:-
Certain deductions to be only on actual payment.
(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
Explanatory Statement
Socio Economic Welfare Measures
1. Promoting timely payments to Micro and Small Enterprises Section 43B of the Act provides for certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income.
2. In order 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 Act. Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that 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 (MSMED) Act 2006 shall be allowed as deduction only on actual payment. However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.
3. Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days.
Thus, the proposed amendment to section 43B of the Act will allow the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
4. This amendment will take effect from 1st April, 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years. [clause 13]
To understand the meaning of terms used in the Section 43B(h) and Memorandum, relevant definitions under the MSME Act 2006 are reproduced hereunder:-
(b) “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.
Explanation.–For the purposes of this clause,–
(i) “the day of acceptance” means,–
(a) the day of the actual delivery of goods or the rendering of services; or
(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;
(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;
(e) “enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;
(n) “supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes,–
(i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956);
(ii) the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956 (1 of 1956);
(iii) any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises;
UPDATED MSME Classification and Criteria
Classification of MSME has to be based on Turnover and Investments as below:
| Type of enterprise | Investment in P&M | Turnover |
| Micro | Rs 1 crore | Rs 5 crore |
| Small | Rs 10 crore | Rs 50 crore |
| Medium | Rs 50 crore | Rs 250 crore |
Any enterprise to fall in any of the aforesaid categories should meet both the criteria mentioned against each.
Section 15
Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days.
Effect on Industry and Trade
The heading of the provision under explanatory memorandum indicates that it has been introduced as socio economic welfare measure for micro and small enterprises. However, the language of this provision such that it will do more harm to them than good. I will try to explain it with the following example:-
Suppose there is a large enterprise A having turnover of Rs. 500 crores. Against this it purchases raw material amounting to Rs. 300 crores and other inputs amounting to Rs. 50 crores. Out of these purchases about 20% i.e. 70 crores are from Micro and small enterprises. If anything goes wrong with this enterprise, it may not be in a position to make timely payments to its suppliers despite its best intentions and good track record of making timely payments to its suppliers in the past. Suppose such overdue outstanding payments at the close of the year are about 30% of the total purchases i.e. 105 crores. Under these circumstances, it will have to pay additional income tax @ 34.944% (Basic Rate 30%+Education Cess 4%+Surcharge 12%) amounting to Rs.36.7 crores. Hence, its financial position will go from bad to worse. Suppose today unit is on the verge of closure and running from pillar to post to run the show. A welfare state cannot ask him to pay huge tax on this sum now and then claim the benefit thereof next year. I fear next year this unit may not remain in existence to avail the benefit of this deduction of Rs. 105 crores, against which tax has to be paid now.
Similarly due to not receipt of timely payments from A, its suppliers won’t be in a position to make timely payments to their suppliers. Suppose their input output ratio is again 70%. Hence they may also become defaulters under MSME Act to their suppliers with this amount of Rs. 105/- crores not received by them in time. Resulting in additional tax liability of Rs. 36.7 crores in their hands also. This process will percolate down to other units in the value chain and will have multiplier effect across all sectors of the economy. Even the Micro and Small Enterprises will have to face this disallowance and consequent additional tax. Hence, entire industry, trade and commerce will end paying up more income tax to the Government and the only gainer in the process will be government. Thus Keynesian multiplier effect will come into play with full force.
In this manner industry across the value chain will suffer, whereas the Government may end up increasing its income tax revenue many more times the initial overdue payment of Rs. 105 crores by A. This will result in big jolt to industry on the whole including micro and small enterprises, adversely affecting the overall economy of the country and employment situation. Under these circumstances there is every possibility that now booming economy may end up in recession, consequent effects thereof are not difficult to imagine.
Impact on industry and trade catering to farming community and rural households
Majority of India’s population in lives in villages, where major source of their livelihood is agriculture. Most of the villages buy their daily need items on credit and this credit cycle runs from crop to crop. Hence, industry and trade catering to them have to run their credit cycle accordingly. The enterprises catering to this segment my end up paying double the income tax worked out in in case of Unit A, because here normal credit period will be 6 months. Even banks make their credit policies tailored to meet the requirements of this sector. Under these circumstances, how industries catering to them can make payments to their suppliers against their supplies within 45 days i.e. the maximum time limit prescribed under MSME Act. If disallowances u/s 43B(h) are made in these cases, there will be huge outgo in the form additional income tax they have to chunk out. This may result in anarchy across the economy on the whole, resulting in closure of industry, rise in unemployment, unrest against the Government and system and defaults across the value chain. This will adversely impact not only micro, small, medium and large enterprises but all the enterprises engaged in trade and commerce and including banks and PSUs.
Medium and large enterprises stop buying from Micro and Small Enterprises
There are reports that many medium and large enterprises have stopped buying directly from micro and small enterprises. They asked them make trading firms and they will buy from them.
A review of the aforesaid will indicate that there is every possibility and that a provision that has been made to help micro and small enterprises may ultimately prove suicidal not only for these enterprises, but entire industry and trade also. Under these circumstances, the Government must find some alternative mechanism to address the issue of delayed payment to micro and small enterprises instead of killing the entire industry, trade and commerce, where nobody is gainer except the Government.
The present situation reminds me the story of monkey and two cats that we were taught during school days. In this story two cats found a piece of bread and were fighting for their equal share in it. Both of them saying, the other cat has got bigger share. They went to monkey to decide their case. The monkey ate up entire piece of bread on the pretext of equal division of that bread among the quarreling cats. If this story is applied to present situation, Micro and small enterprises on one hand and all other industry, trade and commerce on the other are akin to two cats who are fighting and Government is akin to monkey, who is to decide their case. Instead of doing justice to them, it is increasing the share of its revenue and both the cats are looking to its face out of helplessness.
The situation may become precarious in times to come and it is time for the Government to act fast by suitably amending the provisions of Section 43(B)(h) in the interest of equity, fair play and ease of doing business. Lest the things may go out of control and the goodwill earned by Modi Government with so much hard work during last 10 years may not thin out. This will be very unpleasant situation both for the Government and its people.
The way out
I sincerely believe that micro and small enterprises can be better served if application of this provision is restricted only to medium and large enterprises and to encourage these enterprises to buy more and more from micro and small enterprises by introducing special incentives for doing so. This can be the win-win situation for all. Will the Hon’ble Finance Minister please listen?
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