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To safeguard the interest of the MSMEs, the government introduced section 43B (h) of the Income Tax Act, 1961 last year. The Finance Act of 2023 inserted a new clause (h) in income tax section 43B that allows deductions made to MSMEs on an actual payment ground rather than the accrual basis if the payment is created within the threshold limit.

Certain deductions to be allowed only on actual payment

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 in the year of payment.

Key Points:

1. This provision is applicable from the FY 2023-2024.

2. This provision is applicable on purchase of goods or services from Micro and Small Enterprises registered as Manufacturer or Service Provider.

3. This provision will apply on transactions happened during the FY 2023-2024.

4. This provision is applicable for all assessee(s) whether MSME registered or not.

5. This provision does not applicable on purchase of goods or services from Medium Enterprises.

6. This provision does not applicable on purchase of goods or services from Micro and Small Enterprises registered as Trader.

7. This provision does not applicable to the outstanding balance as stood in the books of accounts as on 01.04.2023.

8. This provision does not applicable to the assessee opting for presumptive taxation.

9. Even if payment is made before the due date of ITR filing, it will be allowed only in the year of payment.

10. Definition of Micro, Small Enterprises and Medium Enterprises:

Classification of MSME is based on Annual Turnover and Investment in Plant and Machinery or Equipment as below:

Type of enterprise Annual Turnover (Rs. in Crores) Investment in Plant and Machinery or Equipment (Rs. in Crores)
Micro 5 1
Small 50 10
Medium 250 50

What assessee needs to do:

1. First, assessee should identify the payments to be made to suppliers.

2. Out of these suppliers assessee need to check which supplier is having Udyam Registration Certificate.

3. Assessee need to obtain such Udyam Registration Certificate from the supplier in order to identify type of enterprise (Micro/ Small/ Medium) and Major Activity (Manufacturer/ Service Provider/ Trader).

4. Then, assessee needs to filter the suppliers who is Micro or small enterprises and is Manufacturer or Service Provider.

5. Now assessee have to see, whether any agreement is executed between supplier and assessee for payment, if so; payment to be done within the time-limit decided between supplier and assessee which can be maximum 45 days of purchase and where no agreement is executed between supplier and assessee for payment, then payment to be made within 15 days of purchase.

6. Lastly, by applying provisions as mentioned in the above point no. 5, identify the supplier who are outstanding, immediately make the payment in order to avoid the disallowance under section 43B(h) of the Income Tax Act,1961.

Quantum of Disallowance under section 43B(h) of the Income Tax Act, 1961: 

1. Disallowance will be made to the extent of amount outstanding at the closing of the financial year (for this year it is 31.03.2024) related to Micro or small enterprises who are manufacturer or service provider.

Disclaimer: Foregoing discussions cannot be treated or considered as legal opinion.

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