In order to protect and promptly make payments to the MSEs, Clause (h) in Section 43B, inserted vide the Finance Act 2023, provides that if payment to the MSEs is not made within the prescribed timeline, then deduction of such sum payable to the MSE will only be allowed on a payment basis from the profits of the FY in which the payment was made.
Page Contents
- Definition of micro enterprise and small enterprise:-
- Is Udyam Registration Mandatory?
- Prescribed Time under Section 15 under MSMED Act:-
- Implication of Non- Compliance Of Section 43B(h):-
- Applicability of provisions of Section 43B(h) on wholesale and retail traders:-
- Implication on GST Component, if sum payable to MSE disallowed
- Implications of provisions of Section 43B(h) on capital expenditure
Definition of micro enterprise and small enterprise:-
- Micro enterprise: An enterprise having investment in plant and machinery or equipment not exceeds Rs.1 Crore and turnover not exceeds Rs. 5 Crores.
- Small enterprise: An enterprise having investment in plant and machinery or equipment not exceeds Rs. 10 Crores and turnover not exceeds Rs. 50 Crores.
Is Udyam Registration Mandatory?
The second paragraph of the Notification suggests that individuals aiming to set up a micro, small, or medium enterprise have the option to register through the Udyam Registration portal online. The usage of ‘may’ in this context implies that obtaining Udyam Registration is not a compulsory step for an enterprise to qualify as an MSME.
Nonetheless, Section 43B(h) makes reference to Section 15 of the MSMED Act, which addresses the issue of delayed payments to a ‘supplier.’ According to Section 2(n), a “supplier” is defined as a micro or small enterprise that has submitted a memorandum as per the provisions of Section 8(1), which is essentially the Udyam Registration.
Therefore, it can be deduced that for the provisions of Section 43B(h) to be applicable, Udyam Registration is a requisite.
Prescribed Time under Section 15 under MSMED Act:-
The timelines for payment to MSEs as provided in Section 15 of the MSMED Act are as under:
| Scenario | Timelines |
| If payment timelines have been specified under an agreement between the buyer and MSE
|
Payment should be made within earlier of the following dates:
a) Due date specified in the agreement, or b) 45 days from the ‘day of acceptance’. ‘Day of acceptance’ is the day of actual delivery of goods or the rendering of services. However, if an objection is raised by the buyer in writing within 15 days of the delivery of goods or services, the ‘day of acceptance’ would be the day on which objection is removed by the MSE. |
| If payment timelines have not been specified under an agreement between the buyer and MSE | Payment should be made within 15 days from the day of acceptance. |
Implication of Non- Compliance Of Section 43B(h):-
- Interest:- A buyer who fails to make payment within the Specified timelines as mentioned in Section 15 of MSMED Act, will be liable to pay compound interest at the rate of three times the bank rate.
Further, Section 23 of the MSMED Act read with Section 37(1) of the IT Act provides that such interest on delayed payment will not be allowable as a deduction in the computation of income of a buyer.
- Disallowance of expense:- A buyer who fails to make payment before the end of financial year, then such expenses is disallowed as per Section 43B(h) of Income Tax Act.
Examples for better Understanding:-
| S. No. | Day of acceptance of goods or services | Due date of payment as per agreement | Specified time as per Section 15 of MSMED Act | Date of actual payment | Tax implication under Section 43B(h) |
| 1 | April 01, 2023 | April 30, 2023 | April 30, 2023 | March 31, 2024 | FY 2023-24: No disallowance, as payment made within the FY |
| 2 | April 01, 2023 | No agreement | April 16, 2023 | March 31, 2024 | FY 2023-24: No disallowance, as payment made within the FY. |
| 3 | March 01, 2024 | April 10, 2024 | April 10, 2024 | April 10, 2024 | FY 2023-24: No disallowance, as payment made within the specified time. |
| 4 | March 01, 2024 | April 10, 2024 | April 10, 2024 | June 15, 2024 | FY 2023-24: The payment to MSE will be disallowed, as payment not made within the specified time.
FY 2024-25: The amount disallowed in the preceding FY will be allowed on payment. However, the interest under Section 16 of MSMED Act for delay in payment will be disallowed. |
Applicability of provisions of Section 43B(h) on wholesale and retail traders:-
Initially, the Ministry of MSME issued an Office Memorandum dated June 27, 2017, stipulating that wholesale and retail trade will not be considered as MSMEs. However, pursuant to the representations from traders, the Ministry of MSME through an Office Memorandum dated July 2, 2021, decided to include wholesale and retail traders within the purview of MSMEs.
It should be noted that although wholesale and retail traders are included in the MSME category, the benefits accorded to them under MSMED Act are limited to priority sector lending. All other benefits, including those related to delayed payments, have not been extended to them. This was further clarified by Ministry of MSME through Office Memorandum dated September 01, 2021.
On review of the above, it can be inferred that Section 43B(h) will not be applicable to wholesale and retail traders as they are not subject to the delayed payment provisions under the MSMED Act.
Implication on GST Component, if sum payable to MSE disallowed
When the amount due to a Micro or Small Enterprise encompasses GST, the non-deductible portion is confined to the sum excluding GST, provided that the GST is acknowledged as Input Tax Credit (ITC) in the financial records.
Conversely, should the purchaser decide against claiming the GST as an Input Tax Credit and instead records it as an expenditure in the Profit and Loss account, the deduction pertaining to GST will hinge upon fulfilling the stipulations outlined in Section 43B(h).
Implications of provisions of Section 43B(h) on capital expenditure
In contrast to Section 37(1), the tax deductibility criteria under Section 43B do not hinge on whether the expenditure is capital or revenue in nature. Instead, Section 43B encompasses any payable sums that are otherwise deductible under this Act.
Consequently, Section 43B(h) is pertinent to payments made to micro or small enterprises concerning the acquisition of capital assets, where a full deduction is permissible under Sections 30 to 36 of the Act.
To illustrate, consider the full deduction of capital outlays under Section 35AD, as well as the complete deduction for capital investments in scientific research stipulated under the same section.
Thus, it is only in certain exceptional scenarios, where deductions for capital expenditures are sanctioned, that Section 43B(h) comes into play; in other instances, it does not apply.
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Disclaimer: The contents of this article have been prepared in accordance with the relevant provisions, and information available at the time of preparation. The views and opinions expressed in this article are those of the author and the author does not take any responsibility and cannot guarantee that no inaccuracy occurs.
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