Section 43B(h) – A technical guide to decode the new clause

Introduction: Section 43B of the Income Tax Act 1961 allows taxpayers to claim deductions on certain expenses paid on an accrual basis. With the introduction of a new clause (h) under Section 43B, effective from FY 2023-24, it becomes crucial to understand its implications, particularly concerning payments to MSME registered vendors. New clause (h) under Section 43B, is added vide finance Act 2023.

Section 43B of Income tax Act 1961 allows a taxpayer to claim deductions on certain on payment basis. Certain expenses such as Employer contribution to provident fund, ESI, Interest on loan from financial institution, leave credit payment and certain other payments as covered under section 36 of Income tax Act, 1961.

Section 43B covered the following expenses until FY 2023-24 (AY 2024-25): –

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or

(c)  any sum referred to in clause (ii) of sub-section (1) of section 36, or

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(da) any sum payable by the assessee as interest on any loan or borrowing from ⁵³[a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company], in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or

(g) any sum payable by the assessee to the Indian Railways for the use of railway assets

From FY 2023-24 (AY 2024-25) new clause (h) has been added vide finance Act 2023, which now provides Section 43B to cover payments to MSME registered vendors as per Section 15 of MSME development Act, 2006.

Let’s now begin decoding clause (h) of section 43B.

Applicability: Applicable to all persons entering into transactions with MSME registered vendors. This clause is applicable when a taxpayer buys or obtains any goods or services on credit from a MSME registered Vendor.

Non-Applicability:  The said clause (h) of section 43B is not applicable when a taxpayer buys or obtains any goods or services on credit from a MSME registered, if such MSME registered vendors are traders or wholesalers as per the definition of enterprise as per MSMED Act, 2006.

Time limits prescribed under MSMED Act, 2006: Every person entering into credit transactions with MSMEs need to pay the due within 45 days as per section 15 of the MSMED Act, 2006. Depending upon the presence of written agreement. In absence of written agreement, the payment has to be made within 15 days. In presence of written agreement, the same has to be paid as per the agreement terms which shall not exceed 45 days.

Examples of Section 43B(h):

(Table 1)

As depicted in table 1, It is clear that in absence of written agreement 15 days is the maximum available for an enterprise to clear the dues, whereas in the cases where written agreement is present the due date is earlier of the date mentioned in the agreement or 45 days from the accepted date whichever is earlier to ensure compliance with Section 43B(h).

Reporting under clause 26 of Tax audit report in Form 3CD: Amendments to part A of clause 26 have been made to ensure implementation of Section 43B(h), whereas amendments in part B is pending for clarification.

Penalties for failure to pay MSME’s within due date: In case of late payment to MSME registered vendors, Interest is applicable at such rate prescribed by RBI from the date of invoice or appointed date till the payment date, and such interest or penalty is disallowed as expense in computation of Taxable income as per Income tax Act, 1961.

Benefits of Section 43B(h)

1. Improved cash flow management: Timely payments enable MSMEs to maintain healthy cash flow, which is essential for meeting day-to-day operational expenses, purchasing inventory, investing in growth initiatives, and servicing debt obligations. A steady inflow of payments reduces financial stress and the working capital crunch. This would in turn create a positive working capital.

2. Enhanced Business sustainability: Timely payments contribute to the overall sustainability of MSMEs by providing them with the financial resources needed to weather economic downturns, unforeseen expenses, and market fluctuations. This would ensure a stable business operation and also to survive the dynamic waves of market.

3. Promotion of Entrepreneurship: Timely payments create a conducive environment for entrepreneurship by lowering barriers to entry and encouraging new ventures to enter the market. Timely payments act as a financial infuse to the venture which would eventually downturn the interest payments and reduce finance costs.

4. Strengthened Supply Chains: MSMEs often serve as integral components of larger supply chains, providing goods and services to larger corporations and multinational companies. Timely payments from buyers enable MSME suppliers to fulfil their contractual obligations, maintain production levels, and meet delivery deadlines. By strengthening supply chains, timely payments enhance overall operational efficiency and competitiveness, benefiting both MSMEs and their corporate partners.

Conclusion: Understanding Section 43B(h) is essential for taxpayers to ensure compliance with tax regulations and timely payments to MSME registered vendors. Adhering to the prescribed time limits not only avoids penalties but also fosters a conducive environment for MSMEs, contributing to economic growth and stability.