Introduction:-
In accordance with the amendment to Section 43B of the Income Tax Act, a new regulation for timely payment by Small and Micro Enterprises (MSMEs) has been implemented from FY 2023-2024. If you have purchased goods or availed services from an MSME supplier, it is now mandatory to plan a payment agreement with them under this regulation.
The timing of payments for MSMEs under Section 43B:-
To promote timely payments to Small and Micro Enterprises (MSMEs), the Central Government included payments made to them within the ambit of Section 43B of the Income Tax Act in the 2023 budget.
Payment agreements and timelines: for MSMEs:-
Under this provision, if you have purchased goods or services from a supplier who is an MSME and there is an agreement between you and them regarding payment, you must make the payment within the timeframe specified in the payment agreement. If the timeframe exceeds 45 days, you must make the payment within 45 days at most. While the timeframe in the agreement can be less than 45 days, it cannot exceed it.
Compulsory payment: Negotiations with MSME vendors:-
If you have not entered into an agreement with your supplier, you must make the payment within 15 days. This can be easily understood that the Sundry Creditors appearing in your balance sheet as of March 31, 2024, and if they are older than February 15, they will be included in your 2023-2024 income, and you will have to pay tax on it. Even if they are creditors after February 15, you still have to make their payment within 15 or 45 days. Your CA will check in your next year’s bank statement whether their payment has been made or not.
Payment deadline: Interval between 15 days and 45 days:-
As per the MSME Act, you are required to make payments to all your suppliers registered as MSMEs within 15 days. If you have a written agreement with your supplier, you can make the payment according to that agreement, but that agreement cannot exceed 45 days. If the agreement exceeds 45 days, you must make the payment within 45 days. The timeframe in the agreement can be less than 45 days, but not more.
Importance of declaration: Clarity on MSME status with suppliers:-
For this, you will have to obtain a declaration from all your suppliers stating whether they are Small and Micro Enterprises or not. If you do not have a Declaration at the time of audit, your CA will consider all those Creditors as Small and Micro Enterprises (MSMEs) for which you do not have a Declaration. The supplier who provides you a Declaration stating that they are not MSMEs, you are not obligated to make their payment within 15 or 45 days.
Audit and assurance: Identification of your suppliers’ MSME status:-
Any Creditor whose payment is Outstanding for more than 15 or 45 days will be listed in your balance sheet as of 31/03/2024. In that situation, during the audit, your CA will ask for a declaration from all your Outstanding Creditors. Those for whom there is no declaration will be considered registered under MSME, and if their payment is Outstanding for more than 15 or 45 days, they will be added to your income, and you will have to pay tax on it.
Who falls under the definition of MSME: Inclusion of Traders:-
Some people are also confused about whether traders come under the definition of Small and Micro Enterprises (MSMEs) along with manufacturers and service providers. While that is not the case. The government issued an office memorandum on September 01, 2021, under which traders can register under MSME, but traders will only be limited to the benefits of the MSME Act up to Priority Sector Lending, and they will not receive the benefit of Delayed Payment as per the MSMED Act, 2006. Therefore, traders will not be included in the provisions of 43B. If you are a trader and your registration in MSME has been done in the category of manufacturer or service provider, then you can get it amended.
MSME Declaration – Pay attention when giving declaration:-
If you give someone a Declaration, think carefully. Your category is written on your MSME certificate. If Small or Micro is written on it, then you will tell in your Declaration that your firm comes under MSME and the provisions of Section 43B(h) apply to you. And if Medium is written on the MSME certificate, then you will tell that your firm comes under MSME, but the provisions of Section 43B(h) do not apply to you.
Definition of MSME:-
Three types of firms fall under the ambit of MSME: Micro Enterprises, Small Enterprises, and Medium Enterprises. Only Micro and Small Enterprises have been included in the provisions of Section 43B of the Income Tax Act. Medium Enterprises have not been included in this. Now it is also very important to know who is Micro, who is Small, and who is Medium. The definition of this is given in the MSME Act, which is as follows:
Micro Enterprises are those whose turnover is less than 5 crore per year and investment in plant and machinery is less than 1 crore.
Small Enterprises are those whose turnover is less than 50 crore per year and investment in plant and machinery is less than 10 crore.
Medium Enterprises are those whose turnover is less than 250 crore per year and investment in plant and machinery is less than 50 crore.
Conclusion: Section 43B(h) of the Income Tax Act mandates timely payments to Small and Micro Enterprises (MSMEs), emphasizing the importance of payment agreements and adherence to specified timelines. Businesses must ensure compliance with payment deadlines, obtain declarations from suppliers regarding their MSME status, and understand the definition of MSME to navigate the regulatory landscape effectively. By adhering to these requirements, businesses can mitigate risks, maintain regulatory compliance, and foster positive relationships with MSME suppliers.
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