The Finance Act, 2023 inserted clause (h) to section 43B applicable from 01.04.2024 which means it is applicable from the assessment year 2024-25 onwards. In the effort to enhance liquidity for MSME entities and to improve the payment cycle of Micro and Small Enterprises, the government has implemented this clause.
Section 43B(h) of the Income Tax Act brings attention to the timely payment obligations to Micro & Small Enterprises. Businesses need to adhere to the specified payment periods, failing which disallowances and compound interest may apply.
Understanding the implications is crucial for both buyers and sellers in the MSME sector to navigate the tax landscape effectively.
Legal Provision –
Section 43B(h) of Income Tax Act, 1961 –
An extract of the section is reproduced as below:
“43B(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 (27 of 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 55[[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.”
Now as per plain reading of above section, we get to know that a person has to pay to his supplier, being a micro or small enterprise, within the time limit specified in section 15 of MSMED Act, 2006.
It is to note that only Micro and Small suppliers are covered in section 43B(h). So, even if we fail to pay a supplier (i.e. classified as Medium Enterprise) within the time limit specified in section 15 of MSMED act this will not disallow that expenditure.
Classification of enterprises –
An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely : —
- 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;
- 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;
- 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.
Section 15 of Micro, Small And Medium Enterprises Development Act, 2006
“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.”
As per MSMED Act, 2006 these terms are defined in section 2:
“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;”
In simple words :
Where payment to ‘micro’ or ‘small’ enterprise registered under MSME Act, is not made within 45 days (in case of written agreement) or 15 days (in case of no agreement) such purchase / expense from MSME shall not be allowed in the relevant Financial year as per the Income tax Act. The said purchase / expense shall be allowed in the year when payment is made.
Moreover, According to Noti : RBI/2006-2007/306
If an enterprise not make payment to Micro & Small Enterprises in above specified period, then it has to make payment of compound interest at 3 times the Bank Interest notified by Reserve Bank Of India.
Conclusion:- With the above background we can conclude that those suppliers who don’t have Udyam Certificate would not be eligible to become Micro and Small Enterprise as per MSMED Act, 2006 and would not be covered in section 43B(h).
*****
Disclaimer:- The opinions presented are exclusively those of the author. The material in this piece is intended purely for informational purposes and for individual, non-commercial consumption. It does not constitute expert guidance or an endorsement by any organization. The author, the organization, and its associates are not liable for any form of loss or harm resulting from the information in this article, nor for any decisions made based on it. Furthermore, no segment of this article or newsletter should be employed for any intention unless granted in written form, and we maintain the legal right to address any unauthorized utilization of our article or newsletter.
Author Bio
