CA Mahesh Agarwal
Through the Finance Act 2023 a new clause (h) has been added to Sec. 43B of the Income Tax Act and is made applicable from assessment year 2024-25 i.e. Financial year 2023-24. Sec. 43B with the amendment reads as under –
“43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of —
(a) To (g) ……………
(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,
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.
Provided that nothing contained in this section, except the provisions of clause (h), shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return”
(new addition by the Act are shown in italics)
The amendment is applicable to all assesees having income from business or profession.
Thus, if the buyer assessee fails to make payment to any of his supplier, who is registered as a “micro” or “small” enterprise under the MSMED Act, within the time specified under Sec. 15 of the MSMED Act, he would not get the deduction of his purchases in the year of purchase but would get the deduction only in the year of actual payment. The time limit for payment to micro and small enterprises, as per Sec. 15 of MSMED Act, is 15 days or to the maximum 45 days if there is a written agreement between the parties. Further, the amendment is applicable to all payables whether against goods or services.
The impact of the amendment is clarified with the following examples –
|Case||Supply/bill received on||Payment to be made as per MSMED Act 2006||Actual date of payment||Consequence|
|1||25/03/2024||– If written agreement, payment to be made within 45 days ie. by 09/05/ 2024.
– If no written agreement, payment to be made within 15 days ie. by 09/04/ 2024.
|28/03/2024||No impact as there would be no outstanding as on 31st March 2024.|
|2||25/03/2024||– If written agreement, payment to be made within 45 days ie. by 09/05/ 2024.
– If no written agreement, payment to be made within 15 days ie. by 09/04/ 2024.
|30/04/2024||No Impact as payment is made by specified time.
Would be disallowed as payment made after specified date.
|3||25/03/2024||– If written agreement, payment to be made within 45 days ie. 09/05/ 2024.
– If no written agreement, payment to be made within 15 days ie. 09/04/2024.
|15/05/2024||Would be disallowed as payment made after specified date in both situations.|
To properly understand the impact of this amendment it is necessary to know as to which supplier would fall under this category. The classification of “micro, small and medium” enterprises as per MSMED Act is as below –
|Investment in Plant, Machinery or equipment||Not More than 1 Cr||Not more than 10 Cr||Not more than 50 Cr|
|Turnover||Upto 5 Cr Annually||Upto 50 Cr Annually||Upto 250 Cr Annually|
It is noteworthy that in the aforesaid amendment to Sec. 43B only “micro” and “small” enterprises are covered. Therefore, payment to “medium” enterprises is out of the purview of this amendment.
To further understand the overall implications of this amendment some of the relevant provisions of the MSMED Act 2006 are given below –
Sec. 15 – Liability of buyer to make payment.—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 in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
Sec. 16. Date from which and rate at which interest is payable.—Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
Sec. 22. – Requirement to specify unpaid amount with interest in the annual statement of accounts.— Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely:— (i)the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year; (ii) the amount of interest paid by the buyer in terms of section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year; (iii) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act; (iv) the amount of interest accrued and remaining unpaid at the end of each accounting year; and (v) the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23.
Sec. 24. – Overriding effect.—The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
Thus, in nutshell, the MSMED Act provides that –
a) Payment to supplier should be made within 15 days or to the maximum within 45 days by having an agreement with the supplier.,
b) For any delayed payment the buyer shall be liable to pay compound interest with monthly rests to the supplier at three times of the bank rate notified by the Reserve Bank.,
c) Buyer would make specific disclosures in his audited accounts with regards to outstanding principal and interest etc., and
d) These requirements, having overriding effect, are mandatory in nature.
Overall Implications –
Thus, overall implications of the amendment in Sec. 43B of the Income Tax Act along with the mandatory provisions of MSMED Act would be that –
a) Any disallowance, due to operation of newly inserted Clause (h) of Sec. 43B Income Tax Act, would be added to the taxable income from business and would increase the tax liability for the year.
b) The disallowance would also affect the payment of advance tax already made which will fall short and would attract interest for short payment. While the subsequent payment made to supplier would be deducted from taxable income in the year of actual payment, the interest paid for short payment of advance tax would be net loss.
c) Any delay in payment, beyond the specified date, would make it necessary to make provision for delayed interest as per MSMED Act which, however, will not be allowed as expenditure in tax returns. Further, Such provision of interest, if exceed 5000/- for any party, would also attract TDS provisions. This requirement would be applicable even for the old liabilities unless they are claimed as disputed or not payable which will have its own ramifications.
d) Though for corporate entities there is already requirements for certain disclosures with regards to MSME creditors but now for non-corporate entities also various disclosures would be required in audited accounts as per Sec 16 of the MSMED Act.
Way forward what needs to be done –
In the light of above discussion and implications –
1. Since it is the liability of the assesse to identify their supplier’s status, therefore, written declaration from all suppliers of goods or services as to their status of registration under the MSMED Act should be sought. If they claim their status as ‘registered’, also obtain copy of their registration certificate from which their category as “micro”, “small” or “medium” may be established.
2. The business entity, for easy monitoring, should create two separate groups for creditors – one for ‘micro and small suppliers’ and one for ‘other suppliers’.
3. If possible, written consent from all micro and small suppliers, for payment within extended period of 45 days, may be obtained.
4. To avoid above implications regarding delayed interest and also disallowance under the amended provision of Income Tax try to make payment to all micro and small enterprises within specified days.
5. Since the provision of interest would be applicable to delayed payment of old opening balances also, try to clear them at the earliest possible and try to make the payment bill wise within the specified period as generally payments are adjusted on first come first serve basis.
Gray Area –
The above discussed amended provision applies to any sum payable by the assessee to a micro or small enterprise. The term ‘enterprise’ as per section 2(e) of the MSMED Act is defined as below –
“(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.”
Thus, as per the above definition only a supplier who is either a manufacturer or a service provider would only qualifies as ‘enterprise’; but with effect from 01.12.2020, vide office memorandum of Ministry of Micro, Small & Medium Enterprises (Policy Division) following are also allowed to be registered as MSME –
a) Wholesale and retail trade and repair of motor vehicle and motorcycles
b) Wholesale trade except of motor vehicles and motor cycles
c) Retail Trade Except of Motor Vehicles and motor cycles
However, the definition of ‘enterprise’ remains unchanged under the MSMED Act 2006.
As such, though section 15 and 16 of the MSMED Act would be applicable to all businesses registered under the MSMED Act (now on Udyam portal) as they refer to ‘buyer’ and ‘supplier’ and not to ‘enterprise’, a question may arise as to the applicability of amended provision to the payment to a supplier who is registered as ‘Trader’. If strict rules of interpretation are applied, the ‘trader’ would not qualify as ‘enterprise’ and therefore any delayed payment to such ‘trader’ supplier would not hit by the amendment though provision of section 15 & 16 for interest and disclosure would still be appliacable as per MSMED Act.
Therefore this gray area needs to be clarified by the government at the ealirest.