Introduction: The Finance Act 2023 has introduced significant amendments to Section 43B of the Income Tax Act, 1961, directly impacting corporate dealings with Micro and Small Enterprises (MSMEs). This change, aimed at ensuring timely payments to MSMEs, mandates corporates to reassess their payment processes and adhere to the specified timelines as per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The new clause (h) in Section 43B, effective from the assessment year 2024-25, emphasizes the non-deductibility of expenses for payments delayed beyond the stipulated period to MSMEs, underscoring the need for corporates to prioritize their payment protocols.
“any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006)”
Section 15 of the MSMED Act mandates payments to MSMEs 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.
Provided that nothing contained in this section [except the provisions of clause(h)] shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.”
As per section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore, once the payment of interest on delayed payment to MSME is regarded as a penal in nature and it is not allowed as an expenditure under Income Tax Act 1961 due to the overriding effect of section 23 of MSMED Act 2006.
If creditors are outstanding as on March 31 for a period exceeding 45 days or 15 days, as the case may be, the that expenses will be disallowed for the relevant year, and it will be allowed in the year in which the said payment is made.
Generally, as per section 43B disallowances, expenses are allowed as deduction if it is paid on or before due date of filing return of income as prescribed under section 139. It is not the case with section 43B(h) disallowances, where in it will be allowed as expenses in the year in which the same is paid.
As the section is applicable for the computation of income from the AY 2024-25, the payment to check shall be for the previous year ending 31/03/2024. For most of the business following mercantile system of accounting, the amount debited to profit, and loss account shall be from 01/04/2023 and not any earlier year. So, provision of section 43B(h) not applicable outstanding balance as on 31/03/2023.
Accordingly,
1. At the year-end each enterprise (irrespective of audit applicability) should assess the status of their outstanding creditors as the Micro and small enterprise and as well as Manufacturer, service providers and Traders/retailers.
2. At the year-end define age of outstanding creditors like below 15 days, more than 15 days but below 45 days and more than 45 days.
3. It is highly recommended to obtain MSME certificate along with declaration on the classification of an enterprise from a supplier along with written agreement. Like Micro, Small and Medium Enterprises, Turnover of preceding year etc.
Conclusion: The amendment to Section 43B of the Income Tax Act by the Finance Act 2023 serves as a catalyst for corporates to reevaluate their payment strategies towards MSMEs. By implementing the recommended action points, businesses can not only comply with the new regulations but also contribute positively to the financial stability of MSMEs. This legislative change underscores the importance of fostering a supportive ecosystem for small enterprises, reinforcing timely financial transactions as a cornerstone of corporate responsibility and ethical business practices.
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