Amendment in Section 43B of Income Tax related to MSME

“Stay updated on the recent amendment to Section 43B of the Income Tax Act related to MSME. Explore the impact on expense deductions, payment timelines, and compliance with the MSMED Act, 2006. Ensure timely payments to Micro and Small Enterprises to avoid disallowances and interest implications.”

AMENDMENT RELATED TO MSME

1. As per amendment made by the Finance Act, 2023 where payment to ‘micro’ or ‘small’ vendor registered under MSME Act, is not made within period specified u/s 15 of MSMED Act, 2006, the expense from MSME shall not be allowed under Income tax laws.

2. Section 15 of the MSMED Act mandates payments to micro and small enterprises within-

-If agreement stipulated 20 days than payment is to be made within 20 days of invoice.

-If agreement stipulated 60 days than payment is to be made within 45 days of invoice.

-If no agreement than within 15 days of invoice.

3. That, the proposed amendment to section 43B of the Act will allow the payment as deduction only on payment basis.

SECTION 43B

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

……………………………………………..

“(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 sub­section (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.

MSMED ACT, 2006

4. SECTION 15, LIABILITY OF BUYER TO MAKE PAYMENT:

15. 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.

Appointed Day

2(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;

SECTION 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.

SECTION 23. INTEREST NOT TO BE ALLOWED AS DEDUCTION FROM INCOME.

Notwithstanding anything contained in the Income-tax Act, 1961 (43 of 1961), the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.

5. Definition of Micro, Small and Medium: (As amended by vide notification F. No. 21(5)/2019-P&G/Policy (Pt-IV)] dated 26th June, 2020)

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

Examples: –

Invoice date	Due Date		Amount of Expense	Paid Date	Allowance Year	Disallowance Year
	Agreed Date	No Agreed Date
12/07/23	26/08/23	–	12,00,000	31/03/2024	FY 23-24	No Disallowance
12/07/23	–	27/07/23	12,00,000	31/03/2024	FY 23-24	No Disallowance
12/07/23	26/08/23	–	12,00,000	10/04/2024	FY 24-25	FY 23-24
12/07/23	–	27/07/23	12,00,000	10/04/2024	FY 24-25	FY 23-24
12/07/23	26/08/23	–	12,00,000	4.00 lakhs paid 31/10/2023 and remaining 8,00,000 on 15-04-2023	FY 23-24 4,00,000/- FY 24-25 8,00,000	FY 23-24- 8,00,000/-
04/03/24	18/04/24	–	12,00,000	20/04/2024	FY 24-25	FY 23-24
01/03/24	15/04/24	–	12,00,000	15/04/2024	FY 23-24	No Disallowance
01/03/24		15/03/24	12,00.000	16/03/2024	FY 23-24	No Disallowance
31/03/24		15/04/24	12,00.000	15/04/2024	FY 23-24	No Disallowance
31/03/24		15/04/24	12,00.000	20/04/2024	FY 24-25	FY 23-24

Note:

1. Agreed Date cannot be more than 45 days.

2. Agreed Date can be mentioned in the bill or in agreement, if not mentioned in bill or in agreement than 15 days is to be taken in terms of section 15 of MSMED Act and disbursed the payment to the MSME Vendors within the time framed. Otherwise, the Compound Interest is to be levied as mentioned in section 16 viz. 3 times of Bank rate.

Conclusion:  

Purchase and Expenses incurred on or after 01^st February every year is to be checked if relates to micro or small then payment has to be made within time as per MSMED Act, 2006. (it is assumed that purchase and expenses incurred before 01^st February, shall be anyhow paid upto 31^st March.)

Otherwise purchase/expense shall be disallowed and shall be allowed in the year of actual payment, however interest to be booked for all MSME if payment is not made within the time frame and the same is disallowed FOREVER.