The recent amendment regarding disallowance of business expenditure under Income tax Act, 1961 due to delayed payments to MSMEs has sparked significant debate within the business industry.
According to the amendment, payments made by business assessees to Micro or Small enterprises registered under Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”), will not be allowed as deduction under Income tax regulations, if not made within the period specified under section 15 of MSMED Act. Subsequently, such payment shall be allowed in the year in which payment is made.
The primary objective behind this amendment, introduced by the Ministry is to ensure timely payments for goods supplied or services rendered by Micro or Small Enterprises. Consequently, it places additional responsibilities on businesses to adhere to the payment timelines stipulated under the MSMED Act. However, while the Ministry’s intentions were noble, the implementation has taken an unexpected turn, creating issues not only for business houses but also for Micro and Small enterprises themselves.
Amendment in Income Tax – Section 43B.
Section 43B of the Income Tax Act, 1961, allows certain expenses such as tax, duty, cess, fee, and interest on loans or borrowings from banks or public financial institutions to be deductible in the period of actual payment. With this amendment, another clause (h) has been inserted into the list of such payments, covering any sum payable by the assessee to a Micro or Small enterprise beyond the time limit specified in section 15 of the MSMED Act, 2006.
Furthermore, the proviso of 43B, which provides exceptions to this section and allows deductions in the year in which the expense is incurred if the payment is made by the due date of furnishing the return of the assessee, has been amended. Under this amendment, clause (h) mentioned above has been excluded from this proviso, implying that the benefit of the extended payment period until the due date of the return is not available in MSE payment cases.
Implication of Change – Responsibility or Hardship
With this change in 43B of Income Tax Act, 1961 when read with provisions of MSMED Act, there are multiple financial, regulatory, and operational implications on the industry as follows:
1. Businesses are required to make payments to Micro & Small Enterprises within the timelines provided in the MSMED Act.
i. If there is no written agreement – 15 days of acceptance of goods/services.
ii. If a period is agreed upon in writing between parties – As per the agreement (Maximum 45 days).
2. In case of delay in payment beyond this stipulated time, the business expense deduction will be disallowed and subsequently allowed in the period when the actual payment is made (Section 43B(h)).
3. The benefit of the proviso of 43B, which provides an extended timeline for actual payment until the due date of furnishing the income tax return for other clauses, is not available for the clause on such MSE payments.
4. The amendment in 43B(h) is applicable from 1st April 2024, giving a very short timeline for the industry to implement.
5. Furthermore, for any such delay in payment, the buyer is liable for interest liability with monthly compounding at a rate 3 times the bank rate notified by RBI (Section 16 of the MSMED Act).
6. Any such interest shall not be allowed as a deduction in any period during the computation of income (Section 23 of the MSMED Act).
7. The business needs to obtain declarations from the suppliers regarding their status as Micro or Small enterprises to comply with the requirements.
Industry Concerns
The industry is raising various concerns due to inherent challenges not thoroughly considered by the Ministry before its announcement. Some concerns include:
- The new rule could impact relations between suppliers and buyers who often work with these small businesses on a credit system.
- Industries like Textile, Automobile, Agro-based sector, etc., which are largely dependent on Micro and Small Businesses, may face severe financial and regulatory challenges.
- Considering the implications, businesses may tend to prefer Medium enterprises, resulting in a loss of business for Micro and Small Enterprises.
- Many Micro & Small Enterprises may be willing to work with a larger credit period, with a commercial interest of big business opportunities and business volume. However, the regulatory change, supposed to be a boon, is turning out to be a bane for them.
- The Confederation of All India Traders have requested the finance minister for one year extension.
Conclusion
The introduction of clause (h) to Section 43B of the Income Tax Act, 1961, was a well-intentioned move to safeguard the interests of MSMEs by ensuring they receive timely payments for their services. However, the reality of its implementation has revealed a complex web of financial, operational, and regulatory challenges for businesses. The industry’s response, underscored by concerns over financial strain and potential disruption of long-standing business practices, has prompted a call for reassessment of the amendment
The concerns of the industry and the adverse effects of execution have compelled the FM to reconsider this proposal and make requisite adjustments to the recently introduced amendment. The Department of Revenue is reviewing the proposal to assess if any changes are possible to align with the intentions and objectives of the Ministry.
As the dialogue between the government and the business community continues, the ultimate goal remains to find a mutually beneficial solution that upholds the spirit of the amendment while addressing the practical challenges it presents.
Author Bio
There are many Babus who do this intentionally to bring a bad name for the present Govt. These Babus should be pulled up and given exemplary treatment!