Latest Important Amendment in Section 43B of Income Tax Act related to MSME (Small and Micro) vide insertion of Clause (h) to Section 43B:
Introduction
The Income Tax Act of India underwent a significant amendment in its Section 43B, particularly with the insertion of Clause (h) by the Finance Act of 2023. This amendment addresses the treatment of payments made to micro or small enterprises (MSMEs) and introduces a crucial change in the deduction process. Section 43B has long been a vital aspect of tax regulations, ensuring that specified expenses are allowed as deductions on an actual payment basis rather than accrual. However, the recent addition of Clause (h) brings a new dimension to the treatment of payments to MSMEs, impacting both buyers and sellers in this sector.
Understanding Section 43B
Section 43B dictates that certain specified expenses can only be claimed as deductions under the head ‘Income from business and profession’ when paid, rather than when they become due. Nevertheless, an exception is made if the payment is made on or before the due date of return filing, along with the submission of evidence of such payment. This provision ensures that taxpayers cannot delay payments to claim deductions but must settle their liabilities within the stipulated timeframe.
For instance, if taxes or duties are due for the previous year 2023-24, the taxpayer must make the payment before the due date of return filing, i.e., 31st July 2024, to claim deductions in the relevant assessment year. Failure to do so results in the allowance of deductions in the year of payment.
Introduction to Clause (h) Amendment
The latest amendment introduces Clause (h) after Clause (g) in Section 43B, specifically addressing payments to micro or small enterprises. According to Clause (h), if an assessee makes a payment to a micro or small enterprise beyond the limit specified in Section 15 of the Micro, Small and Medium Enterprises (MSME) Act, 2006, the deduction for such payment will not be allowed in the previous year when the payment is due. Instead, it will be permitted in the previous year when the payment is actually made.
Unlike other expenses covered by Section 43B, where deductions are allowed if payments are made on or before the due date of return filing, Clause (h) sets a different criterion. It mandates that payments to micro or small enterprises must be made within the limits specified in Section 15 of the MSME Act for deductions to be allowed in the current assessment year.
Understanding Section 15 of MSME Act, 2006
Section 15 of the MSME Act, 2006, deals with the delayed payment to MSMEs by buyers. It stipulates that buyers are obligated to make payments within 15 days in the absence of an agreed-upon payment date. If an agreed date exists, the payment must be made on the agreed date or within a maximum of 45 days, whichever is earlier. Failure to make timely payments subjects the buyer to compound interest, and, as per the latest amendment to Section 43B, deductions for such payments are disallowed under the head ‘Income from business and professions.’
Micro and Small Enterprises Criteria
To qualify as micro or small enterprises under the MSME Act, the following criteria apply:
1. Micro Enterprises: Investment in Plant and Machinery or Equipment not exceeding Rs 1 crore and Annual Turnover not exceeding Rs 5 crore.
2. Small Enterprises: Investment in Plant and Machinery or Equipment not exceeding Rs 10 crore and Annual Turnover not exceeding Rs 50 crore.
Examples Illustrating the Amendment’s Impact
To further understand the implications of the amendment, consider the following examples:
1. If goods or services are sold or rendered by micro or small enterprises with an agreed payment date of 24-08-2023, and the buyer makes the payment on 25/02/2024, the deduction will be allowed in the assessment year 2023-24, as it exceeds 45 days specified in Section 15.
2. If there is no agreed-upon date, and the payment is made beyond 15 days, the deduction will not be allowed in the assessment year 2023-24, even if the payment is made within the same year.
3. If the payment is not made within 45 days from the date of sale or rendering of services within the same assessment year, the deduction is disallowed for the year, and it will be allowed in the subsequent year.
Role of Tax Auditors
Tax auditors play a crucial role in ensuring compliance with Section 43B(h). They need to verify whether businesses have adhered to the specified limits and report their findings in the Tax Audit Report. It is imperative for tax auditors to confirm that outstanding sundry creditors as of 31.03.2024 do not exceed 45 days. Auditors may need to communicate with vendors, especially Small and Micro entities, to assess the status of outstanding balances and verify compliance.
Conclusion
The latest amendment to Section 43B of the Income Tax Act, particularly the inclusion of Clause (h), marks a positive development for micro and small enterprises. It addresses the issue of delayed payments faced by these entities, ensuring that buyers can claim deductions only when payments are made within the stipulated timeframes. This amendment aligns with the government’s commitment to supporting and promoting the growth of MSMEs, recognizing their vital role in the Indian economy. As businesses and tax professionals adapt to these changes, it is crucial to stay informed and compliant with the amended regulations to ensure smooth operations and financial governance.
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