INTRODUCTION:
Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) provides that where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
Section 15 of the MSMED Act provides that in no case the period agreed upon between the supplier and the buyer for payment of invoice in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
The “Appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
Section 23 of MSMED Act has specifically prohibited the assessee from claiming the deduction from the income on account of interest paid to MSME.
Section 24 of MSMED Act provides that sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
It will not be out of context to mention that The Companies Act, 2013 provides that a Company must file e-form MSME-1 every half year with Registrar of Companies mentioning all the transaction, wherever payment made after 45 days and is also required to give certain additional information in its financial statements.
PRINCIPAL vs. INTEREST ON DELAYED PAYMENT
Sections 15 to 24 of the MSMED Act make a buyer liable to pay interest but they, by themselves, do not require the buyer to make payment to the supplier. However, as payment of such interest is considered as penal in nature, no deduction is allowed under section 37 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
AMENDMENTS PROPOSED BY FINANCE BILL, 2023
In order to promote timely payments to micro and small enterprises, the Finance Bill, 2023 (hereinafter referred to as “the Bill”). proposes to include payments made to such enterprises within the ambit of section 43B of the Act. Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the MSMED Act shall be allowed as deduction only on actual payment.
However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.
IMPACT OF THE PROPOSED AMENDMENT
Section 43B of the Act provides that deduction for certain sums specified in its clauses (a) to (g) is allowable only on actual payment. However, the Proviso to this section allows deduction on accrual basis if the specified sum is paid by due date of furnishing of the return of income. The sums covered by clauses (a) to (g) may have fallen due for payment before the close the financial year and remain unpaid at the end of the year. In respect of these sums, section 43B is not concerned whether the payments had fallen due or not before the end of the financial year. The Section and the proviso thereto read together provide that deduction is allowable if the actual payment is made by the due date of furnishing the return of income.
But so far as the sum covered by the proposed clause (h) is concerned, the payment of the principal sum due to a Micro and Small Enterprise must be made within the time limit specified in section 15 of the MSME Act so as to qualify for deduction.
The Finance Bill states that proviso to section 43B will not apply to such payments. But it was not necessary to state so. It seems that Government is stated this as a measure of abundant precaution in view of controversies that arose in the past regarding employees’ contributions to provident funds.
It should also be noted that if sums remaining unpaid to the Micro and Small Enterprises at the end of the year for a period of less than 15 days or 45 days, as the case may be, shall not attract section 15 of the MSME Act and therefore, will not attract the provisions of clause (h) of section 43B of the Act.
APPLICABILITY
The Bill provides that this amendment will take effect from 1st April, 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years. It means the proposed amendment will apply to payments falling due on or after 1st April, 2024 and not to the unpaid amounts brought forward from past years on 1st April, 2024.rding employees’ contributions to provident funds.
It should also be noted that if sums remaining unpaid to the Micro and Small Enterprises at the end of the year for a period of less than 15 days or 45 days, as the case may be, shall not attract section 15 of the MSME Act and therefore, will not attract the provisions of clause (h) of section 43B of the Act.
Author Bio
if any MSME COMPANY SUPPLY MATETIALS AS PER AGREED DELIVERY SCHEDULE ,BUT WITH INCOMPLETE INVOICE or without supporting documents.
the buyer intimate the same but vendor could Supply after 30 days from receding the notice and then buyer starts inspection and materials are found as per agreed specification.
now from which date counting of 45 days will start.
a) submission of correct invoice or supporting documents
OR
b) from acceptance of materials which was processed within 15 days after getting all corrected invoice with supporting documents
please give expert opinion, because it has been o bserved that some MSME TAKE ADVANTAGE OF GUIDELINES OF 45VDAYS BUT DO NOT SUBMITT CORRECT INVOICE AS WELL SUPPORTING DOCUMENTS ON THE DATE OF SUPPLY OF MATERIALS.
REGARDS,
A.K.SAHA