Disallowance of Outstanding Payments to Small & Micro Enterprises: Income Tax Act

Budget 2022 introduced section 43B(h) under the Income Tax Act, 1961 from FY 2023-24, which states that expenses payable to ‘Micro’ and ‘Small’ enterprises will not be allowed as a tax deduction if the same is paid beyond the due dates mentioned in the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). If paid beyond the due dates mentioned in the MSMED Act, the same shall be allowed in the year in which such payment is made. Further, the extended limit till filing of tax return to claim expenses does not apply to these payments.

Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days.

Therefore, any amount outstanding as on 31 March 2024 and subsequent years, payable to micro and small enterprises, shall be only allowed only if it is paid within the credit limits prescribed under MSMED Act i.e. 15 / 45 days.  Further, the benefit of the first proviso to section 43B will not be available for dues to micro and small enterprises. Hence, even though payment is made after 31 March but before filing the return of income, the deduction can only be claimed in the year in which actual payment is made and not in the year of booking expense.

Brief Analysis

1. The provisions of section 43B are applicable to all kinds of tax-payers having income under the head Profits and Gains from business or profession.

2. This provision is applicable from FY 2023-24. Hence, this provision is not applicable for an amount outstanding to micro and small enterprises (‘vendors/enterprise’) as of 31 March 2023. It will apply to the transactions from 1st April 2023 and outstanding balance in respect of these transactions.

3. A vendor /enterprise, which is not registered under MSMED Act but has merely furnished the declaration in writing to the MSMED authorities clarifying their type of Enterprise viz. “Micro / Small” are required to be considered as such for all purposes of Section 43B as Micro / Small Enterprise.

4. Amounts outstanding to Micro and Small enterprises as on 31 March 2024 and subsequent years will be allowed as tax deduction only if the same are paid within the time lines mentioned under the MSMED Act – 15/45 days. The same can be understood via following examples:

5. As per the MSMED Act, the categorization of enterprises is as under:

6. Applicability to vendors who are ‘Traders’:

As per MSMED act, 2006, an “enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any specified industries or engaged in providing or rendering of any services. Hence, the definition of enterprise does not include traders. Therefore, even though a trader can register itself under MSMED Act for certain other benefits, provisions of section 43B cannot be made applicable to dues outstanding dues to the traders. In case the vendor is both a trader and a manufacture or service provided, provisions of section 43B may be applicable for the dues outstanding irrespective of the nature of outstanding dues.

7. Applicability of outstanding dues in relation to vendors of Capital Expenses and Provisions

It is a settled principle that section 43B is applicable only to those deductions which are otherwise available under the Income Tax Act. Capital expenditure is not an allowable expense under section 37 of the Income Tax Act. Hence, no disallowance may be attracted under section 43B for dues outstanding in relation to capital expenditure.

For provision for expenses, there is no actual delivery of goods or services. Hence, the timelines of 15/45 days as per the MSMED Act do not apply in the cases where a mere provision is made for expenses and consequently, provisions of section 43B will not be applicable.

8. Section 43B does not apply to the tax payers opting for presumptive taxation under section 44AD, 44ADA, etc. Hence, no disallowance can be made in such cases.

PRACTICAL ASPECTS & WAY-FORWARD

9. It is the prima-facie duty of the tax-payer to find out from the vendor / enterprise whether the same is a ‘micro, small or medium enterprise’. Hence, the tax payers should start identifying and categorizing its vendors accordingly.

10. If the tax payer has the MSME/ UDYAM registration number of the vendor, the tax payer may go on the MSME portal and check the categorization of the vendor as per MSME records.

11. The tax payer may find out the amounts outstanding to ‘micro and small’ vendors and pay the same within 15/45 days or before 31 March, as applicable, to avoid disallowance under section 43B.

Conclusion: In conclusion, the article emphasizes the profound impact of Section 43B(h) on taxpayers and underscores the importance of compliance with MSMED Act timelines. It provides practical insights for tax planning, vendor categorization, and timely payments to ensure allowable deductions. As taxpayers navigate this new provision, a cautious and informed approach is crucial to mitigate risks and uphold compliance standards.

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Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The details mentioned above are as on January 2024 and the same may vary in future. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal and we do not assume any responsibility or liability, financial or otherwise, in respect of the same.

About the Authors: The above write-up is written by CA Shravan Suratwala and Sairam Khond. The authors can be reached at contact@smsuratwala.com or shravan.suratwala@outlook.com

Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 9+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation along with three plus years of experience in the field of Internal and Process Audit while pursuing chartered accountancy course.

Sairam is currently pursuing his Chartered Accountancy course and is currently completing his internship with S.M. Suratwala & Co., Chartered Accountants, Pune.