Implications of Section 43B(h) of Income Tax Act, 1961

The amendment to Section 43B(h) under the Income Tax Act introduces significant changes concerning disclosure, timely payment, and allowance/disallowance related to MSME (Micro, Small, and Medium Enterprises) suppliers. This amendment, effective from the financial year 2023-24, applies to all assesses. Specifically, Section 43B(h) focuses on the obligation to disclose and make timely payments to MSME suppliers, emphasizing the importance of adherence to the provisions outlined in the Income Tax Act, 1961. This alteration underscores the government’s commitment to streamlining processes related to MSME transactions and ensuring compliance with the revised regulations by all assesses.

Introduction:-

Explore the implications of Section 43B(h) of the Income Tac Act, a crucial amendment aiming to ensure timely payments to Micro, Small Enterprises (MSMEs). Effective from April 1, 2023, this section imposes disallowance for delayed payments, impacting the taxable income of the assessee.

This clause is applicable on all types of Purchases Made from the enterprise which had been registered under MSMED Act, 2006. This clause is applicable on Micro & Small Enterprise. Medium Scale Enterprise are outside the ambit od this clause.

Section 43B(h) states that ant sum payable by the assessee to a Micro & small enterprise beyond the time limit specified in Section 15 of Micro, Small and Medium Enterprise Development Act, 2006 Shall be allowed only in computing the income referred in Section 28 of that previous year in which sum has been actually paid.

Applicability of clause (h) of Section 43B:

This clause is applicable when an enterprise is buying goods or taking services from an enterprise which has been registered under MSMED Act 2006

Note:-

“Registration of buyer under MSMED Act,2006 is not mandatory. Clause h of Sec 43B(h) is applicable from 1^st April 2023.”

Let’s us first understand the meaning of Micro & Small Enterprises: –

Micro Enterprises: –

Enterprise which is fulfilled all the below mentioned conditions.

(a) Investment is Plant and Machinery Should not exceed 1 Crore

(b) Turnover should not exceed 5 Crores

Small Enterprises: –

Enterprise which is fulfilled all the below mentioned conditions.

(a) Investment is Plant and Machinery Should not exceed 10 Crore

(b) Turnover should not exceed 50 Crores

Analysis of section: –

> Enterprise needs to pay to micro & small suppliers within 15 or 45 days

> If payment is not made within above time period, the amount will be added to the taxable income.

> In case, there is no written agreements, payments shall be made within 15 days.

> If there is a written agreement, payment shall be made as per time mentioned in agreement. The agreements shall be maximum 45 days.

“Payments include Purchase As well as Expenses”

Impact on Taxable Income: –

If payments is not made within specified time, then that amount shall be added to the taxable income of assesses and assesses has to bear the tax liability on such amount. The assessee gets deduction In PY where payments is made.

If an enterprise not make payment to Micro & Small Enterprises in above specified period, then it has to make payment of compound interest at monthly rests to supplier at 3 times the Bank Interest notified by Reserve Bank of India.

Now the question is arising is this interest portion is allowable or not u/s 37?

Under section 16 this interest expenses are in nature of Penal Interest. So, interest expenses incurred for delayed payment to Micro & Small Enterprises is not allowed u/s 37 of Income Tax Act,1961.

Let us understand with help of Practical Example:

X has sold goods to Y on 1^st August 2023

X is a Micro Enterprise

Y has made payment to X on 1^st March 2024

As Y has made payment to X before 31^st March 2024 but after 45 days

Accordingly, to Income Tax Act,1961, We will allow payment In PY 2023-24. But Y has to make payment of compound interest at monthly rests to X at 3 times the Bank Rate notified by RBI even if not demanded by X Calculated from dur date till date of payment.

Moreover, this interest expenses are disallowed while computing Income under the head of PGBP.

Conclusion: –

Section 43B(h) of the Income Tax Act, 1961 brings attention to the timely payment obligations to Micro, Small Enterprises. Businesses need to adhere to the specified payment periods, failing which disallowances and computed interest may apply.

Understanding the implications is crucial for both buyers and sellers in the MSME sector to navigate the tax landscape effectively.