Large companies may, henceforth, not find it easy to escape the taxman’s net with regard to the interest paid or payable to the micro, small and medium enterprises (MSMEs) on overdue payments to them.
Currently, interest paid or payable to MSMEs is not admissible as a deductible expenditure for income-tax purposes. This has been specified in the Micro, Small and Medium Enterprises Development Act 2006 (MSMEDA). The move to deny income-tax deduction on the interest paid or payable to MSMEs was aimed at ensuring timely payments by large companies to small enterprises so that the latter were not hit by cash flow problems.
The Finance Ministry has now put in place a reporting mechanism for the amount of interest that would be inadmissible for income-tax purposes.
The onus of reporting the inadmissible interest amount and certifying it has been placed with the tax auditor, who undertakes tax audit of the company.
For example, if a large company owes Rs 100 to an MSME, of which Rs 90 is the invoice value and Rs 10 is the interest payable on it because of late payment, the tax department will now know the break-up and deny deduction on Rs 10.
The amount of inadmissible interest under MSMEDA is an additional item that has been included in the Form 3CD, which is the tax audit report that certain companies (with turnover of over Rs 40 lakh a financial year or firms/companies with professional receipts of over Rs 10 lakh in a year) have to file with the income-tax department.