Introduction: The recent addition of Section 43B(h) in the Income Tax Act, 1961, is a significant move toward fostering economic growth, emphasizing the need for fair business practices. This guide is here to help individuals better understand and comply with this section, ensuring prompt payments to Micro and Small Enterprises (MSEs) registered under the UDYAM AADHAR scheme.
Why It Matters: Section 43B(h) embodies the commitment to fair economic practices. By encouraging timely payments to MSEs, the provision aligns with the goal of achieving social and economic justice, as outlined in the Preamble and various Articles of the Constitution.
What’s the Objective: The insertion of Section 43B(h) was explicitly mentioned in the Memorandum to the Finance Bill, 2023, as a socio-economic measure. The aim is to create a favorable environment for Micro and Small Enterprises, making it easier to do business and contributing to overall economic development.
Practical Advice: To meet these socio-economic goals, individuals are advised to proactively obtain confirmation from their creditors, verifying their status as Micro or Small Enterprises under the Udyam Aadhar scheme. The disallowance mentioned in Section 43B(h) is contingent upon payments to these enterprises within the timeframe specified by Section 15 of the MSMED Act, 2016.
Key Points from Section 15 of MSMED Act, 2016: Section 15 outlines the Time frame within which payment shall be made to MSMEs and outlines the consequences for failure to make payments within the agreed time frame. Non-compliance attracts penalties, including payment of compound interest and potential legal action.According to this section, the buyer shall make the payment to supplier within the time as agreed between them, however the same cannot exceed 45 days from the date of acceptance or deemed acceptance of goods/services. In case no time period has been agreed upon then payment should be made within 15 days.,
Understanding Definitions: Enterprise (Section 2(e) of MSMED Act): Any business, big or small, involved in the production of goods or engaged in providing or rendering services.
Classification of Enterprises (Section 7 of MSMED Act):
- Micro Enterprise: A small business with investments not exceeding one crore rupees and turnover not exceeding five crore rupees.
- Small Enterprise: A business with investments more than one crore rupees but not exceeding ten crore rupees and having turoner less than 50 crore rupees.
Common Questions Answered:
1. Applicability to All Assessees: Yes, Section 43B(h) applies to everyone, ensuring fair economic practices for all.
2. Applicability to Traders and Consultants: Absolutely. The disallowance under Section 43B(h) covers payments made to traders and consultants, encompassing a wide range of transactions for goods and/or services.
3. Delayed Payment with Interest: While delayed payments are allowed with interest under Section 43B(h), it’s crucial to understand that the specified compound interest is not deductible under the Income Tax Act as provided in section 23 of the MSME Act.
4. Payment Due to Small/Micro Enterprises under Presumptive Taxation (Section 44AD): Yes, payments due to small/micro enterprises availing presumptive taxation under Section 44AD are covered under Section 43B(h). Presumptive taxation was introduced for the ease of doing business, and timely payments fall under its purview.
5. Overriding Effect of MSMED Act, 2016: The MSMED Act, 2016, takes precedence over provisions of the Income Tax Act in matters related to timely payments and the treatment of compound interest.
Practical Tips to Avoid Disallowance:
1. Stay Organized: Keep accurate records of transactions with MSEs, noting payment due dates.
2. Communicate Effectively: Maintain open communication with MSE creditors, discussing and confirming payment timelines.
3. Leverage Technology: Use digital platforms for invoicing and payment tracking to avoid oversights.
4. Seek Professional Guidance: Consult with legal and financial professionals to ensure compliance with both the Income Tax Act and the MSMED Act.
5. Explore Invoice Factoring: Consider partnering with financial institutions for invoice factoring to improve cash flow and meet payment obligations to MSEs.
Conclusion: Section 43B(h) bridges economic practices and socio-economic goals by promoting timely payments to MSEs. Understanding its implications, adhering to Section 15 of the MSMED Act, and embracing practical tips can ensure compliance, fostering fair economic contributions and growth. Geeta Mohanty, Advocate, provides insightful guidance for seamless adherence to these provisions.
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