Introduction: The Finance Bill 2023 has introduced a significant amendment to the Income Tax Act, 1961, affecting Micro and Small Enterprises (MSMEs). Specifically, the amendment introduces Section 43B(h), impacting the deduction of overdue payments to MSMEs. This article delves into the provisions, implications, and steps for compliance with the new regulation.
A. INCOME TAX ACT PROVISIONS:
DELAYED PAYMENT OF PRINCIPAL
In order to promote timely payments to MSMEs, The Finance Bill 2023 has introduced one more measure by amending section 43B of the Income tax act, 1961 to disallow amount of overdue creditors registered as Micro or Small Enterprises under MSME Development Act (MSMED) 2006. The new Clause (h) to Section 43B has been inserted which is applicable from assessment year 2024-25 and onwards is as under.
43B(h):- Any sum payable by the assessee to a micro or small enterprises, beyond the time limit specified in section 15 of the Micro, small and Medium Enterprises Development Act 2006.
shall be allowed as deduction only on actual payment.
Provided that nothing contained in this section [except the provisions of clause(h)] shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.”
Thus, the amendment to section 43B of the Act will allow the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
INTEREST ON DELAYED PAYMENT
As per section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore, once the payment of interest on delayed payment to MSME is regarded as a penal in nature and it is not allowed as an expenditure under Income Tax Act 1961due to the overriding effect of section 23 of MSMED Act 2006.
As per clause 22 of the Tax Audit requires Tax Auditor to report the amount of interest inadmissible u/s 23 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED, Act 2006).
B. MSMED ACT PROVISIONS: –
Section 2(e) “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 industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;
Section 2(b) “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.
Explanation.—For the purposes of this clause,— (i) “the day of acceptance” means,— (a) the day of the actual delivery of goods or the rendering of services; or (b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier; (ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;
Section 15 of the MSMED Act mandates payments to MSMEs 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.
Section 16 of the MSMED Act provides, if payment is not made within the time limit specified under section 15, then the interest payable shall be three times of the bank rate notified by the RBI.
Section 23 of MSMED Act provides, notwithstanding anything contained in the Income tax Act, 1961 (43 of 1961), the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income Tax Act, 1961, be allowed as deduction.
Section 24 of MSMED Act provides that the provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force is having overriding effect to the extent of any inconsistent provisions contained in any other law for the time being.
Definition of Micro, small and Medium Enterprises as per section 7 of MSMED Act, 2006
|Investment in Plant and Equipment’s
|Not more than Rs. 1 crores and
|Not more than Rs. 10 crores and
|Not more than Rs. 50 crores and
|Not more than Rs. 5 crores.
|Not more than Rs. 50 crores.
|Not more than Rs. 250 crores.
C. APPLICABILITY TO TRADER/DISTRIBUTORS: –
As per the definition of enterprises, only persons dealing in either Manufacturing of Goods or providing any services will be classified as an Enterprise. One could surely take a stand that trader /Retailer/Distributor, etc would not be classified as an Enterprise and would not be covered under the Micro or Small Enterprise definition. AND
On simple reading the Office Memorandum No. 5/2(2)/2021-E/P & G/Policy) date 02/07/2021 issued by Government of India, Ministry of MSME.
“Retail and wholesale trades as MSMEs and they are allowed to be registered on Udyam Registration Portal. However, benefits to Retail and Wholesale trade MSMEs are to be restricted to Priority Sector Lending only.”
“For the application of section 43B(h) the supplier should registered under MSMED Act, 2006 as a Micro and Small Enterprises as a Manufacturer and/or Service Provider.”
D. YEAR -END OUTSTANDIGN CREDITORS: –
If creditors are outstanding as on March 31 for a period exceeding 45 days or 15 days, as the case may be, the that expenses will be disallowed for the relevant year, and it will be allowed in the year in which the said payment is made.
Generally, as per section 43B disallowances, expenses are allowed as deduction if it is paid on or before due date of filing return of income as prescribed under section 139. It is not the case with section 43B(h) disallowances, where in it will be allowed as expenses in the year in which the same is paid.
|Actual Payment Date
|Deduction allowed in Which FY
E. APPLICABLE ON OUTSTAIDING PRIOR 01.04.2023: –
As the section is applicable for the computation of income from the AY 2024-25, the payment to check shall be for the previous year ending 31/03/2024. For most of the business following mercantile system of accounting, the amount debited to profit, and loss account shall be from 01/04/2023 and not any earlier year. So, provision of section 43B(h) not applicable outstanding balance as on 31/03/2023.
F. STEP TO BE TAKEN BY THE ASSESSE: –
1. At the year-end each enterprise (irrespective of audit applicability) should assess the status of their outstanding creditors to catharised as the Micro and small enterprise and as well as Manufacturer, service providers and Traders/retailers.
2. At the year-end define age of outstanding creditors like below 15 days, more than 15 days but below 45 days and more than 45 days.
3. It is highly recommended to obtain MSME certificate along with declaration on the classification of an enterprise from a supplier along with written agreement. Like Micro, Small and Medium Enterprises, Turnover of preceding year etc.
4. Tax auditors to scrutinise the information and documents maintained by the taxpayer and authenticity of documents to figure out disallowance under section 43B.
Conclusion: Businesses need to be proactive in assessing the status of outstanding creditors, categorizing them as Micro and Small Enterprises, Manufacturers, Service Providers, or Traders/Retailers. Obtaining MSME certificates, declarations on enterprise classification, and written agreements are essential steps. Tax auditors play a crucial role in scrutinizing information and documents for compliance with Section 43B(h).
This amendment comes into effect from the assessment year 2024-25, and businesses must adapt their practices to comply with the new provisions. Understanding the intricacies of the MSMED Act and Section 43B(h) is crucial for avoiding expense disallowances and ensuring smooth tax compliance.
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