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The Government has been taking various steps to protect the interest of Micro and Small enterprises under the MSMED act which interalia includes time limit for the payment, interest for the delayed payment and fast tract redressal system by name MSME Samadhan scheme etc.

The Protection given is more than adequate as the Micro and Small businesses now only need continued business, financial support, interest rate concession  and subsidy for capital investment.

However the Government is continuing its journey on the collection mechanism of Micro and small business which is not their only priority.

Now in Union Budget 2023, an amendment is brought in Income tax act where if the payments are not made within the time limits under the MSMED act ( which is 45 days from the effective date) the amount payable would  not be allowed as deduction.  In other words the expenditure towards the bills for Micro and Small business would be allowed only on PAYMENT BASIS.

This is a retrograde step .  The Medium and large companies have not segregated the Micro and Small business as this is again a very big work as the norms for the classification has been changed more than once and they have no mechanism to classify themselves.   They have to depend on the information given from the Micro and small units who are mostly unorganized and the information has to be authenticated through an independent source.

The Medium and Large Companies have to now create a team to monitor these payments as the numbers would be high and the classification will keep changing year on year based on the turnover and the capital investment.  This would increase the operational cost of the industries.

Now the Medium and Large Companies would internally take a stand that instead of going through all this process and suffer disallowance for a legitimate expenditure, they would as well do the jobs internally or give the jobs or buy material from a Medium/Large company.  Hence this disallowance would not be in the best interest of the Micro and Small businesses. As enough safeguards are already available in the MSMED act , another legislation viz. Income tax act should not step in .

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June 2024