Reporting Requirement of Clause 22 [Amount Covered under section 43B(h)] of Form 3CD
Introduction: The Central Board of Direct Taxes (CBDT) has recently made significant amendments to Form 3CD through notification no. 27/2024 dated 05.03.2024. These changes, effective from the Assessment Year (AY) 2024-25, pertain to the reporting requirements under Clause 22, specifically focusing on amounts covered under Section 43B(h) of the Income-tax Act. This amendment aims to address the timely payment concerns of Micro and Small Enterprises (MSEs) and ensures compliance with the MSMED Act, 2006.
Amendment to Clause 22 (Amounts Covered Under Section 43B) of Form 3CD
The Central Board of Direct Taxes (CBDT), through notification no. 27/2024 dated 05.03.2024, has introduced several amendments to Form 3CD, effective from the Assessment Year (AY) 2024-25.
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Overview of the Amendment
The Finance Act of 2023 introduced Clause (h) in Section 43B of the Income-tax Act, effective from the assessment year 2024-25. This clause disallows sums payable to MSEs on an accrual basis if they are not paid within the timeframe allowed under Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
By virtue of this section the tax auditors do not need to report detailed break-ups of amounts payable to the MSEs but must form an opinion on the disallow ability of these payments under Section 43B(h). Additionally, it covers the reporting requirements for interest on delayed payments and specifies conditions under which amounts payable to MSEs should be considered admissible for tax purposes
For reporting purpose following amendment made in Form 3CD
The Central Board of Direct Taxes (CBDT) issued Notification G.S.R. 155(E) on 05-03-2024, amending Clause 26 of Form 3CD to include references to Clause (h), extending the reporting requirement to delayed payments to MSEs. However, it was later found that the amendment did not specifically require reporting of amounts not paid within the due date as per the MSMED Act.
A subsequent corrigendum issued by the CBDT, via Notification G.S.R. 223(E) dated 19-03-2024, corrected this oversight. The corrigendum made changes to Clause 22 of Form 3CD, and nullified the changes made to Clause 26. Amended Clause 22 requires the tax auditors to report disallowances under Section 43B(h) and interest on delayed payments to MSEs. This effectively separates the reporting of delayed payments to MSEs from other types of payments covered under Section 43B
Reporting Requirements Under the Amended Clause
Now, the amended Clause 22 requires reporting of:
(1) The amount of interest inadmissible under section 23 of the MSMED Act, 2006
(2) Any other amount not allowable under clause (h) of section 43B of the Income tax Act, 1961
Points to Note:
- If the buyer has not provided interest and/or if there is any dispute pending before MSE facilitation centre, then, present status can be obtained from the auditee. Also, in case of an auditee being a company, reference may be made to MSME-1 form furnished on MCA portal.
- Section 43B(h) is applicable only in respect of the sum payable to a Micro and Small Enterprise.
- It is not applicable to a Medium Enterprise.
Detailed Explanation
The inclusion of Section 43B(h) addresses the concern of timely payments to Micro and Small Enterprises. It stipulates that any sum payable to these enterprises, which is not paid within the stipulated time, will not be allowed as a deduction for the purpose of calculating taxable income.
Key Reporting Requirements:
1. Identification of Payable Amounts:
- Enterprises need to identify sums payable to Micro and Small Enterprises.
- Ensure accurate accounting of these amounts in financial records.
2. Non-Allowable Amounts:
- Any amount payable to Micro and Small Enterprises that remains unpaid by the due date will be disallowed as a deduction under Section 43B(h).
- Report these non-allowable amounts in Clause 22 of Form 3CD.
3. Timely Payment Verification:
- Verify if the payments to Micro and Small Enterprises have been made within the stipulated time frame.
- Report delays in payment, which lead to disallowance under Section 43B(h).
Importance of the Amendment
Looking to Socio Economic Welfare Measures and to ensures that Micro and Small Enterprises receive timely payments, thereby supporting their financial health and liquidity. It also holds larger enterprises accountable for adhering to payment timelines.
Compliance Recommendations
- Review Payment Processes:
- Companies should review and possibly revise their payment processes to ensure timely payments to Micro and Small Enterprises.
- Update Financial Records:
- Update financial records to accurately reflect payable amounts and their payment status.
- Audit Preparation:
- Prepare for audits by ensuring that all payable amounts to Micro and Small Enterprises are accurately reported and any non-allowable deductions under Section 43B(h) are duly noted.
This amendment aligns with the broader objective of fostering a supportive financial ecosystem for Micro and Small Enterprises by ensuring their dues are settled promptly. Companies should take note of this change and adjust their financial practices accordingly to remain compliant.
Suggestive Checklist for the Tax Auditor while reporting on section 43B(h)
(1) This clause 22 of Form No. 3CD has become applicable from AY 2024-25
(2) Clause (h) of section 43B is attracted when any sum payable by the assessee to a micro enterprise or small enterprise is paid beyond the time limit specified in section 15 of MSMED Act, 2006.
(3) Section 43B(h) is applicable only in respect of ‘a deduction otherwise allowable under this Act’.
(4) The tax auditor should seek information regarding status of the supplier of the assessee i.e. whether the supplier being a micro or small enterprise is registered under the MSMED Act, 2006. Where the information is available and has been disclosed, the same should be reported as such in Form No. 3CD. Where the information is not available, the auditor should also mention the same in Form No. 3CD.
(5) The tax auditor should cross check the disclosure made in financial statement with disclosure of information required by section 22 of MSMED Act, 2006
(6) The tax auditor should obtain a full list of suppliers of the assessee who fall within the purview of the definition of “SUPPLIER” under section 2(n) of the MSMED Act, 2006. It is the responsibility of the auditee to classify and identify those suppliers who are covered by this Act.
(7) The tax auditor should obtain the list of trade payable and current liabilities being suppliers of goods and service to whom amount is outstanding as on the last day of the financial year along with working of disallowance under section 43B(h) of the Act required to be reported under Clause 22. The auditee should mention whether it is registered or not under MSMED Act, 1961. In case enterprise is registered the list should be with Udyam Registration Number, Category of Enterprise (Micro/Small/Medium), Major Activity (Manufacturing, Service/Trading), the date of Udyam Registration. The list should mention whether there is a written agreement with the supplier, and if so, the credit period.
(8) The tax auditor should check whether the enterprise is registered under the MSMED Act 2006, since the registration is mandatory for attracting the provisions of 43B(h) of Income-tax Act, 1961.
(9) The provisions of section 43B(h) is not applicable to a supplier who is a retailer or wholesale trader.
(10) Section 15 of the MSMED Act, 2006 requires the buyer to make payment to the supplier of the goods or services on or before date agreed upon (subject to maximum 45 days from the day of acceptance or deemed acceptance) or where there is no agreement in this behalf, before the appointed day. Appointed day means the day following immediately after the expiry of the period of 15 day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from supplier.
(11) To determine whether there is a delay beyond 15 days or 45 days (or the agreed period not exceeding 45 days), as the case may be, and also regarding the day of acceptance, the tax auditor should verify the necessary communications with the suppliers.
Conclusion: The amendment to Clause 22 of Form 3CD, as mandated by Section 43B(h), plays a crucial role in promoting timely payments to MSEs, supporting their financial health, and ensuring larger enterprises remain compliant with the MSMED Act, 2006. By adhering to these reporting requirements, companies contribute to a supportive financial ecosystem for MSEs, fostering economic growth and stability. Tax auditors and enterprises must diligently follow these guidelines to ensure compliance and avoid disallowances under the Income-tax Act.
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