Analysis of Impact on Delay Payment To MSME Under Income Tax

INTRODUCTION:

♦ The Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. It contributes significantly in the economic and social development of the country by fostering entrepreneurship and generating large employment opportunities. The MSMEs are widening their domain across sectors of the economy, producing diverse range of products and services to meet demands of domestic as well as global markets. As the MSMEs contribute around 30 per cent to India’s GDP, employ about 11 crore people, constitute nearly 40 per cent of total exports, and more than half of them are located in rural India.

♦  In majority of India’s MSMEs, payments being delayed and the associated uncertainty is the norm rather than an exception. The buyers realise goods and services, but routinely delay payments. Delayed payments are a critical issue not only affecting MSMEs growth but disrupting the supply chains and denting the economy.

MSMED ACT PROVISIONS:

♦  Section 15 of the MSMED Act mandates payments to MSMEs within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days.

♦  Section 16 of the MSMED Act provides, if payment is not made within the time limit specified under section 15, then the interest payable shall be three times of the bank rate notified by the RBI.

♦ Section 23 of MSMED Act provides, 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.

♦ Section 24 of MSMED Act provides that 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 is having overriding effect to the extent of any inconsistent provisions contained in any other law for the time being.

INCOME TAX ACT PROVISIONS:

♦ INTEREST ON DELAYED PAYMENT

> As per section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore, once the payment of interest on delayed payment to MSME is regarded as a penal in nature then the said expenditure is otherwise not allowable under section 37 of the Income Tax Act, 1961.

> As per clause 22 of the Tax Audit requires Tax Auditor to report the amount of interest inadmissible u/s 23 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED, Act 2006).

♦ DELAYED PAYMENT OF PRINCIPAL

> There is no provision in the MSMED Act or Income Tax Act that mandate the payment to the MSMEs vendor should be made within the time limit.

>  Section 43B of the Income Tax Act provides for certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income.

> In order to promote timely payments to MSMEs, The Finance Bill 2023 proposed to include payments made to MSMEs, within the ambit ofsection 43B of the Income Tax Act.

> It is proposed to insert a new clause (h) in section 43B of the Act to provide that:

• Any sum payable by the assessee to a MSMEs, beyond the time limit specified in section 15 of MSMED Act 2006 shall be allowed as deduction only on actual payment.

> However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.

> Thus, the proposed amendment to section 43B of the Act will allow the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.

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Author: CA. Ajit Kumar, K AJIT & Co. Chartered Accountant in Practice from Patna and can be contacted at [email protected].

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