Income Tax- What is New Provision of 43B For Micro & Small Enterprises

In order to promote timely payments to “Micro and Small Enterprises”  In Budget- 2023, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Income Tax Act. These purchases and expenses will be allowed on mercantile basis in a financial year only if the payment is made within the time limit mandated under section 15 of the  MSMED-2006 (Micro, Small and Medium Enterprises Development Act-2006). If it is not so, the deduction for such payments will be allowed only if the payment is made.

Please keep in mind that Section 43B provision is applicable only in relation to ‘Micro and Small Enterprises’ – and  the Medium Enterprises have been kept out of the effect of this provision of Proposed addition to Section 43B.

Also Read: बजट 2023 – क्या है नया 43B का प्रावधान- अब सूक्ष्म और लघु इकाइयों को समय पर भुगतान करना होगा

Let us see what is this proposed provision and what will be its effect when this provision will be implemented on the expenses and purchases to be incurred from April 1, 2023.

Let us first see that “What is Micro and Small Enterprises as per MSMED Act. 2006 ?

Section 15 of the MSMED Act-2006 enjoins the micro and small enterprises to make payment to them  within the stipulated time as per the written agreement between the buyer and the seller but this stipulated period can never be more than 45 days.  If there is no such written agreement between the buyer and the seller, the payment must be made within 15 days as per this section.

Thus, the proposed amendment to section 43B of the Act will now allow expenses by way of deduction only based on payment made after the lapse of the period mentioned above. This can be allowed on business or mercantile basis only if the payment is made within the time mandated under section 15 of the MSMED Act-2006 and as per the same section this time cannot exceed 45 days in any case.

Let us try to understand it with the help of an imaginary or hypothetical  example:-

If a taxpayer has bought any goods from Micro or Small Enterprises for 10 lakh rupees on February 1, 2024, then according to 45 days it should be paid on March 17, 2024. Now if its payment is not made  March 17, 2024, then now this expenditure will be met on payment basis and not on mercantile  basis. Now even if it is paid till March 31, 2024, based on payment, this expenditure will be allowed in the financial year 2023-24. But if it is paid after March 31, 2024, then it  will not be available in the financial year 2023-24 and it will be available to that taxpayer when it is paid.

Let us see another situation

Goods were purchased on 25th February 2024, even if the payment is made by 10th April 2024, the exemption of this expenditure will be available in the financial year 2023-24 since in this illustration  it is made withing the stipulated period.

In both these cases, it is assumed that there is an agreement between the buyer and the seller for payment of 45 days and if there is no such agreement, then this period will be 15 days only.

Let’s see one more aspect and that is whether this provision will be practically applicable if there is a delay in payment on purchase or expenditure in the year?

Although the micro and small enterprise should get the payment on time and in addition to this, the micro and small enterprise should also pay the other micro and small enterprise on time, but this provision will always benefit the micro and small enterprise during the whole year ?  It is not like this, let’s try to understand it with the help of an example: –

If a taxpayer has bought any goods from micro or small enterprises for Rs 10 lakh on 1 April 2023, then according to 45 days, it should be paid on 15th May 2023, now if it is not paid till 15th May 2023, then now This expenditure will not be met on business basis but on cash or payment basis. Now even if it is paid till March 31, 2024, based on payment, this expenditure will be met in the financial year 2023-24.

Therefore, practically effect of this provision can be seen only when the purchase or expenditure has taken place in the last months of the year because the time for payment under this provision is till 31st March to get the allowability of expenses in the same year.

Now one should think that if he is not getting  the exemption as deduction from the profit  of any purchase or expenditure in a financial year, then its effect will be that  income will increase by that amount and he will have to pay tax on this increased amount and this will be very difficult to bear, then What should be done ?

Now the only solution for this is that now the purchasers of goods and services from  micro and small enterprises will have to get into the habit of making payments on time to them and further these units i.e. the Micro and Small enterprises should pay to the other Micro and Small enterprises within the stipulated  period as mentioned in the  MSMED Act-2006 and or at least before that time which is mentioned in the proposed addition to section 43B to avoid the addition of the same in the Income for that Financial Year.