Amendment in Section 43B of Income Tax Act, 1961: MSME Payment FAQs

Introduction: In recent years, the government’s focus on enhancing liquidity for MSME entities has led to various amendments. The Finance Bill 2023 brought changes to Section 43B of the Income Tax Act, 1961, impacting MSME payments. This article delves into frequently asked questions (FAQs) to provide clarity on the amendment.

Since last few years the government is taking a lot of efforts in enhancing the liquidity to the MSME entities. As a part of the same, amendments were made in Companies Act in 2013 where by the companies were required to report amount outstanding to MSME Entities to the Ministry of Corporate Affairs every year and make provision for Interest on the amount outstanding in excess of the time limit specified in the MSME Act.

In its continuing efforts the government, in Finance Bill, 2023 had made amendment to Section 43B of Income Tax Act, 1961 (‘the Act’) and had inserted subsection (h) to section 43B effective from Financial Year 2023-2024 (Assessment Year 2024-2025).

Accordingly, payments need to be done by assessee business to its suppliers who are registered with MSME as Micro or Small Enterprises within the time specified in Section 15 of the MSMED Act, 2006. Hence, in order to claim deduction under the Act, actual payments have to be done to Micro and small enterprise in cases where goods are purchased or services are availed from them. Failure to which may lead to disallowance of payment and addition to the total income. Introduction of this provision works quite threating to assessee businesses who defaults in making payments to micro and small enterprises.

Here are some FAQs for your easy understanding of this provision:

Q.1 This provision is applicable from when?

Ans: The provision is applicable from FY 2023-24 i.e. AY 2024-25.

Q.2 It is applicable to whom?

Ans: The above provisions are only applicable only to Micro or Small Enterprises who are registered under MSMED Act. 2006. It is not applicable to Medium Enterprises.

Q.3 So, what about unregistered micro or small enterprises? Do these provisions apply to them as well?

Ans: Only micro and small enterprises registered under MSMED Act are covered by this provision. The unregistered micro and small enterprises are outside the purview of these amendments.

Q.4 What about traders registered under MSMED Act?

Ans: As per O.M. 5/2(2)/2021-E/P & G/Policy dated 02-07-2021, wholesale and retail trader are entitled for Udyam registration only for the benefit of Priority Sector Lending only. So, purchase from traders would be outside the purview of these amendments.

Q.5  What is Micro and Small Enterprise?

Enterprise who satisfies the below conditions can register themselves as micro or small enterprise.

Limits	Micro	Small
Turnover	<= 5 crore	<= 50 crore
Investment in P&M	<= 1 crore	<= 10 crore

Q.6 What is the time limit within which payment needs to be made?

Ans: As per Section 15 of MSMED Act, 2006, the buyer will require to make payment;

a) In case of written agreement: within time limit as specified in the agreement but cannot exceed 45 days;

b) In case of no written agreement: within 15 days

Q.7 The time limit of 15/45 days is to be considered from when?

Ans: The time limit is to be considered from the day of acceptance.

As per Section 2 of MSMED Act, 2006, day of acceptance means:

(a) Where no objection raised in writing: the day of the actual delivery of goods or the rendering of services; or

(b) Where objection is raised in writing: In case 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;

Q.8 What are the consequences if the payment is not made within the said time limit?

Ans: If the payment has not been made within the said time limit, then deductions for such payments would not be allowed as deduction for the said financial year and added back in income tax return. The said deduction is allowed in the financial year in which the actual payment is made.

Q.9 How will you identify if your vendor is registered MSME or Not?

Ans: Currently, there is no way to directly check whether your vendor is registered MSME or not. Therefore, you directly have to get the Udyam Certificate from your vendor and verify the same on the MSME portal. The Link is https://udyamregistration.gov.in/Udyam_Verify.aspx

If your vendor is not registered on MSME, take a declaration from them stating that he is not registered under MSME.

Q.10 What nature of payments is included in this provision?

Ans: The above provisions are only applicable in case where the assesse is claiming the deduction of expenditure i.e. revenue expenditure and therefore it is not applicable in case of expenses of Capital nature.

Q.11 Can the terms of payment mentioned in the invoice itself can be considered as written agreement?

Ans: The term “written agreement” is not specified in the act. An agreement means “an offer made by one person and accepted by another must be accepted by all parties involved” and therefore, in my opinion an invoice can be considered as written agreement as it contains all the characteristics of agreement.

Q.12 Applicability of the amendment to section 44AD/ADA/AE of the Act

Ans: The above provisions are also not applicable if you are declaring profits under presumptive scheme u/s 44AD/ADA/ AE of the Act as it is specifically mentioned in the section that “notwithstanding anything contrary contained in section 28 to section 43C” of the Act.

However, there are other views also that Section 43B of the Act is non obstante clause and starts with “notwithstanding anything contained in any other provision of this act” which means that section 43B of the Act has overriding effect against the all the provisions which includes section 44AD/ADA/AE of the Act also whereas Section 44AD/ADA/AE of the Act has overriding effect only against the provision of section 28 to section 43C of the Act. Therefore, section 43B of the Act has large overriding effect as compared to section 44AD/ADA/AE of the Act and as per that section 44AD/ADA/AE of the Act also attracts disallowance of section 43B(h) of the Act

Q.13  Is the deduction allowed if the payment is made before the due date of filing of return?

Ans. It should be noted that, the proviso to Section 43B of the Act regarding payment of allowability of expenditure if paid before the due date of furnishing the return of Income shall not applicable to this. Therefore, even though the payment is made before due date of filing of return, the deduction is not allowed.

Q.14 Is this amendment applicable to transactions on or after 01/04/2023 or is it applicable for Old Outstanding also?

Ans: This amendment applies only to any expenditure incurred on or after 01/04/2023.

Q.15 Is the amendment applicable to the provisions made at the end of the financial year?

Ans: No. It only applies to the expenditures for which the invoices have been raised.

Q.16  How should businesses maintain in Books of Accounts to comply with this provision?

Ans: You are required to categorized the suppliers of goods and services into Micro, Small, Medium and Other Enterprises in your Books of Accounts.

Conclusion: Understanding the recent amendment to Section 43B is crucial for businesses dealing with MSME entities. Compliance with payment deadlines is essential to avoid disallowances. Categorizing suppliers in books and staying informed about MSME registration status are vital steps.

To learn more about this amendment and its practical implications, please refer to my previous article: https://taxguru.in/finance/amendment-relating-to-msme-section-43b-deduction-only-on-payment-basis.html

The information available on this website is solely for informational purposes. In case you have any questions, you can write to me at sharshil323@gmail.com. I’ll do my best to reply to your queries as quickly as possible.