Introduction: Section 15 of the Micro, Small, and Medium Enterprises Development Act, 2006, imposes timelines for payments by the assessee to micro or small enterprises. Compliance with these timelines is crucial for accurate income computation under section 28. This article delves into the provisions of the MSMED Act, specifically section 15, and its impact on the deduction of expenses under section 43B of the Income Tax Act.

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

(h) Any sum payable by the assesse to a micro or small enterprises beyond the time limit specified in section 15 of the micro, Small and Medium  Enterprises Development Act,2006, Shall be allowed only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

Provided that nothing in this section (Except the provision of clause (h) shall apply in relation to any sum which is actually paid by the assesse on or before the due date applicable in his case for furnishing the return of income under section  139(1).

Relevant provisions of the MSMED Act.

  • Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days.
  • section 43B of the Act will allow the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.In other words, liability outstanding as on 31st March of the previous year shall be allowed as deduction only if paid within 15/45 days.
  • Micro Enterprises- Annual turnover not more than 5 Cr AND Investment in P&M or Equipment not more than 1 Cr.
  • Small Enterprises- Annual turnover not more than 50 Cr AND Investment in P&M or Equipment not more than 10 Cr.

Example of payment to MSME Suppliers.

Case Date of supply Date of Actual Payment Payment Interval (No of days) Expense Allowed in FY – 2023-24 Remarks
1 15/06/2023 09/12/2023 177 Yes Payment basis.
2 10/03/2024 14/04/2024 35 Yes Accrual basis.
3 22/07/2023 10/04/2024 263 No Payment basis.
4 15/09/2023  – Pay some amount on 10-03-2024 & other remaining amount on 17-05-2024 177 Days & 245 Days Yes – 10-03-2024 No – 17-05-2024 Payment basis.

Important Points.

  • Provision applicable to all the assesses (Irrespective of audit/turnover) in case of payment to micro or small enterprise.
  • If expense incurred and paid within the Financial Year, it is allowed irrespective of credit period.
  • If expense incurred during the Financial Year and paid in the next Financial Year within credit period allowed, expense allowed.
  • If expense incurred during the Financial Year and paid in the next Financial Year beyond credit period allowed, expense disallowed and allowed in the year of payment.
  • Interest paid on delay payment to MSME is also disallowed.

Conclusion: Understanding the intricacies of section 15 of the MSMED Act is crucial for accurate income computation. Adhering to payment timelines ensures deductions align with Income Tax Act provisions. This article provides insights, examples, and essential points to navigate the complexities of payments to micro and small enterprises in compliance with tax regulations.

Author Bio

Qualification: CA in Practice
Company: Sourabh Navalakha
Location: Ahmedabad, Gujarat, India
Member Since: 11 May 2021 | Total Posts: 3
I am having 4 years of Experience in Direct & Indirect Taxes, I have worked with CA Firm, Pvt Ltd Company and Listed company based in Ahmedabad. View Full Profile

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February 2024