Representation on Disallowance under Section 43B(h) of Income Tax Act, 1961

The Karnataka State Chartered Accountants Association (KSCAA) addresses Hon. Nirmala Sitharaman on challenges arising from the recent amendment to Section 43B(h) of the Income-tax Act, 1961. The amendment, introduced in the Finance Act, 2023, focuses on promoting timely payments to micro and small enterprises (MSEs). However, KSCAA highlights several practical implications and challenges in its representation to the Finance Minister.

KSCAA respectfully seeks intervention from Hon. Nirmala Sitharaman and proposes measures to address challenges. Recommendations include timely FAQs issuance, exempting MSEs from Section 43B(h), partial disallowance, a PAN-based bulk checking portal for MSEs, enhanced awareness campaigns, and a phased implementation timeline. The association emphasizes the importance of collaborative efforts to create a regulatory framework that balances compliance imperatives with practical business realities.

KARNATAKA STATE
CHARTERED ACCOUNTANTS ASSOCIATION (R)

To.
Smt. Nirmala Sitharaman,
Hon. Union Minister of Finance and Corporate Affairs,
Government of India

Date: 29th January 2024

SUBIECT: REPRESENTATION REGARDING DISALLOWANCE UNDER SECTION 43B(h) OF THE INCOME-TAX ACT, 1961

The Karnataka State Chartered Accountants Association (R) (in short ‘KSCAA’) is an association of Chartered Accountants, registered under the Karnataka Societies Registration Act, in the year 1957. KSCAA is primarily formed for the welfare of Chartered Accountants and represents before various regulatory authorities to resolve the professional problems faced by Chartered Accountants and the business community.

In the past, we have written to your good selves many times populating various issues, challenges and hardships being faced by taxpayers and Chartered Accountants and suggesting possible solutions on the same. Herein, we are presenting before your good selves for your kind consideration, an issue regarding disallowance under Section 43B(h) of the Income-tax Act, 1961 (“the Act”).

Introduction –

Vide the Finance Act, 2023 the government emphasized its intention to promote timely payments to micro and small enterprises, proposing to include such payments within the ambit of Section 43B of the Act. The proposal, as outlined in the memorandum involves inserting a new clause (h) in Section 43B, stipulating that any sum payable by the assessee to a micro or small enterprise (“MSE”) beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) shall be allowed as a deduction only upon actual payment. Notably, the proviso to Section 43B of the Act shall not apply to such payments, establishing a distinctive treatment for payments to MSEs.

Section 15 of the MSME Act mandates payments to MSEs within specified timeframes as per the written agreement, not exceeding 45 days. In the absence of a written agreement, the section mandates payment within 15 days. The amendment to Section 43B of the Act, as interpreted, allows the deduction of payments to MSEs exclusively on a payment basis. Accrual basis deduction is permissible only if the payment aligns with the timeframes mandated under Section 15 of the MSME Act.

While the intent behind this provision is commendable, its practical implications have given rise to significant concerns and disruptions within trade and industry. The following issues merit your careful consideration:

• Cashflow challenges

The existing provision, while aimed at ensuring timely payments to Micro and Small Enterprises (MSEs), inadvertently imposes a reciprocal obligation on these enterprises to settle payments with their suppliers within the prescribed deadlines. This creates a cyclical challenge, effectively nullifying the intended benefits and placing MSEs back at the starting point with no discernible advantage and putting them into disadvantage by creating higher tax outflows.

Further, businesses engaged in industries with prolonged supply chains find themselves navigating heightened complexities in maintaining the necessary funds to meet their financial obligations promptly. A classic example can be that of textile industry which grants a credit period of up to 4 months, thereby affecting this segment the most. The industry is grappling with lot of cancelled orders and resistance to buy goods from units registered under the MSEs. Furthermore, the buyers may possibly time their procurement to avoid disallowance.

In essence, the current provision, while well-intentioned, appears to generate a counterproductive outcome for MSEs. The reciprocal payment obligations and the extended supply chain dynamics pose significant hurdles, negating the intended advantages of timely payments and worsening the financial challenges faced by businesses in certain sectors, thereby hampering the business.

• Collating information from suppliers can be tedious –

The present method employed for ascertaining an entity’s MSME status revolves around the process of obtaining declarations or confirmations from suppliers. While this approach is a conventional and accepted practice, a critical shortfall arises from the absence of an efficient mechanism that allows businesses to proactively and easily search for vital details such as NIC codes or the registration status of their suppliers. This poses significant challenges.

A noteworthy aspect compounding this challenge is the lack of awareness among many MSMEs about their own registration status. Often, businesses obtain MSME registration primarily for the purpose of availing benefits such as priority sector lending and reduced interest rates, rather than with a comprehensive understanding of the implications it may have for their clients/ customers. This lack of awareness can inadvertently lead to disallowances for customers who were not duly informed of their suppliers’ MSME registrations.

This situation not only creates a burden on businesses to gather accurate and up-to-date information but also introduces an element of uncertainty in the compliance landscape. Customers relying on suppliers’ declarations may inadvertently face disallowances due to factors beyond their control.

• Higher Tax Burden and Profitability Concerns:

The intricacies of supply chain management, especially in industries requiring substantial stocking, may inadvertently lead businesses to a precarious situation where the tax payable due to the proposed provision eclipses the actual profits generated. This unintended consequence of a higher tax liability, possibly surpassing the earned profits, raises concerns about the fairness and feasibility of the proposed provision.

• Issues Related to Non-payment:

There could be various reasons for non-payment of dues within the prescribed time limit due to approvals, quality and quantity difference, rate dispute, defective services, delivery delays, issues relating to GST for claiming ITC, issues relating to online business, and many more for which a proper resolution is required.

Non consideration of these issues and challenges underscore the urgency for a comprehensive review and resolution of the issues associated with the disallowance. Addressing these concerns promptly is crucial.

Representation:

In light of the aforementioned challenges, we respectfully seek your intervention and guidance to address this issue by considering the following measures:

• FAQs to be issued:

Timely issuance of Frequently Asked Questions (FAQs) is paramount to resolving the aforementioned issues and providing clarity to stakeholders. The creation of a comprehensive set of FAQs, elucidating the intricacies of the amended provisions and addressing common queries, would serve as a valuable resource for businesses. This proactive approach to disseminating information can significantly enhance understanding and compliance across the industry.

• Exempt MSEs from Section 43B:

In light of the challenges and unintended consequences outlined above, the unique nature of MSEs and their vital role in fostering economic growth we earnestly advocate for exempting MSEs from the provisions of Section 43B(h) of the Act.

This recommendation aligns with the broader goal of promoting the growth of MSEs, reducing administrative complexities for these entities, and ensuring a more conducive business environment. We believe that exempting MSEs from the rigors of Section 4313(h) of the Act would not only be a strategic move to support the backbone of our economy but also mitigate unintended challenges arising from the current proposal.

• Partial Disallowance:

In recognition of the diverse challenges faced by businesses across various sectors, which encompass issues like cash flow constraints and heightened working capital demands, we earnestly advocate for adoption of a nuanced and inclusive approach. Specifically, a partial disallowance of 30%, mirroring the established provisions outlined in Section 40(a)(ia) of the Act. This adjustment has the potential to offer substantial relief to businesses dealing with financial strain, fostering a balanced and equitable regulatory environment across different segments of the economy.

• PAN-Based Bulk Checking Portal:

In line with the successful implementation reporting portal with respect to compliance check for Section 206AB and Section 206CCA, we advocate for the creation of a PAN-based bulk checking portal for MSEs. This portal would serve as a centralized platform for businesses to efficiently validate the MSME status and other pertinent details of their suppliers in bulk. The streamlined verification process afforded by such a portal would not only enhance efficiency but also contribute to a more transparent and compliant business ecosystem.

• Enhanced Awareness Campaigns:

Comprehensive awareness campaigns emerge as a cornerstone in navigating the complexities introduced by the new provision. Initiatives aimed at educating both traders and suppliers about the intricacies and implications of the amended regulations are indispensable. These campaigns should particularly underscore the significance of NIC codes and other pertinent details for ensuring accurate compliance.

• Implementation Timeline:

Concerns surrounding the speed of implementation merit careful consideration. It is essential to address these concerns and contemplate suggestions for a phased or staggered approach to implementation. A measured rollout would afford businesses the necessary time to adapt and align their practices with the new requirements, preventing undue disruption to their operations.

The introduction of transitional measures or grace periods stands out as a pragmatic recommendation to alleviate the immediate impact on businesses adjusting to the new requirements. These measures can serve as a bridge, offering businesses a breathing space to realign their processes and adapt to the evolving compliance landscape.

We appreciate your good selves attention to these critical considerations and anticipate collaborative efforts in shaping a regulatory framework that balances the imperatives of compliance with the practical realities faced by businesses. Your intervention is pivotal not only to alleviate the financial difficulties faced by taxpayers but also to bolster confidence in the tax system, reaffirming the government’s commitment to safeguarding taxpayers’ rights. We trust in your commitment to upholding the principles of fairness, justice, and efficient tax administration.

Taking into consideration the hardships caused, we the members of Karnataka State Chartered Accountants Association, on behalf of the entire Chartered Accountants community and also on behalf of the trade and industry in the state of Karnataka appeal to your good selves to kindly consider our above request.

Yours sincerely,

For Karnataka State Chartered Accountants Association ®

Cc to:

1. Shri. Pankaj Choudhary, Hon’ble Minister of State, Finance.

2. Shri .Sanjay Malhotra, Hon’ble Revenue Secretary

3. Shri. Nitin Gupta, Chairperson, Central Board of Direct Taxes

4. Smt. Chaitali P, PCCIT, Karnataka and Goa