Introduction: The deduction of expenses on payments to Micro and Small Enterprises (MSMEs) is a crucial aspect governed by Section 43B(h) of the Income Tax Act 1961. This provision aims to promote timely payments to foster the growth of MSMEs. Understanding its implications and compliance is essential for businesses.
Deduction of expenses on payments to Micro and Small Enterprises
Section 43B(h) of Income Tax Act 1961
- In order to promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Act.
- Accordingly, section 43B of the Act to provide that 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 (MSMED) Act 2006 shall be allowed as deduction only on actual payment.
| Particulars | Investment in Plant & Machinery or Equipment | Annual Turnover |
| Micro Enterprises | Not more than Rs. 1 Crore | Not more than Rs. 5 Crore |
| Small Enterprises | Not more than Rs. 10 Crore | Not more than Rs. 50 Crore |
- As per the Act stipulated period for payment is 15 days if there is no agreement for the payment period, and maximum permissible payment period is 45 days which can be agreed by both the parties.
- Clause under section 43B state that payments made before due date of filing of ITR are allowed as deduction, however the said benefit is not applicable to the payments made to MSME beyond the specified limit under MSME Act.
- It is to be noted that payment of entities registered as micro enterprise or small enterprise under MSME Act is to be made before the financial year end in which invoice is received or due date (as per point number 3 above) for payment whichever is later.
We will understand the impact with the help of below situation –
1. Situation as on 31st March 2024 –
Total Creditors outstanding – Rs. 5 Crore
Total MSME Creditors out of total outstanding – Rs. 2 Crore
Total “Micro & Small” MSME Creditors out of total MSME – Rs. 1 Crore
2. Identifying the disallowance –
Disallowance under section 43B(h) for non-payment of Micro and Small MSME registered Enterprises will be Rs. 1 Crore.
3. Assessing the tax implications –
If Tax rate assumed 25%
Additional Income Tax Liability will be Rs. 25 Lakhs for FY 2023-24.
These disallowed amounts will be allowed in the financial year in which the actual payment will be made to these Micro and Small Enterprises.
Below are the few examples for calculating the disallowance and understanding the impacts on various situations –
| Sr No | Invoice Date | Agreed Period | Due Date | Payment Date | 43B(h) Impact |
| 1 | 01/06/2023 | 25 Days | 26/06/2023 | 20/02/2024 | Allowed for FY 2023-24 on payment basis. |
| 2 | 01/06/2023 | 25 Days | 26/06/2023 | 04/04/2024 | Not allowed for FY 2023-24. Will be allowed on payment basis. |
| 3 | 20/03/2024 | 45 Days | 04/05/2024 | 20/05/2024 | Not allowed for FY 2023-24. Will be allowed on payment basis. |
| 4 | 20/03/2024 | Not Agreed
(15 Days to be taken per MSMED Act) |
04/04/2024 | 10/04/2024 | Not allowed for FY 2023-24. Will be allowed on payment basis. |
| 5 | 20/03/2024 | 25 Days | 14/04/2024 | 10/04/2024 | Allowed for FY 2023-24. |
Please note is it important to maintain the records of invoices wise payments to the Micro and Small Enterprises in order to arrive at correct figures of expenses allowed as deduction under section 43B and expenses to be disallowed under section 43B.
Below process may be followed –
- Entity should collect the MSME Registration Certificates from all the suppliers.
- If the supplier not registered then take a confirmation mail from the supplier and keep the same on record.
- Categorize the suppliers at accounting level based on the Certificates received from suppliers – Micro/ Small/ Medium/ Not registered.
- Keep a documentary record of confirmation/ agreement of days agreed for payment between company and supplier for payment. Prepare a supplier wise agreed payment days listing.
- Keep invoice wise payment records mandatorily to avoid any complications.
- It is to be ensured that by 31st March 2024 no MSME invoices, more than 15 days are pending for payment where payment terms are not approved between the company and supplier.
- It is to be ensured that by 31st March 2024 no MSME invoices, more than 45 days or agreed period (Whichever is lower) are pending for payment where payment terms are approved between the company and supplier.
- Ensure that all supplier invoices prior to 31st March 2024 are recorded in books prior to 31st March 2024 and Payment are made as per “clause 6” (15th April 2024) or “clause 7” (15th May 2024/ agreed period whichever is earlier).
Conclusion: In conclusion, businesses must navigate the intricacies of Section 43B(h) to optimize deductions for MSME payments. Adhering to timelines, categorizing suppliers, and maintaining meticulous records are key steps to ensure compliance and minimize tax implications. Timely payments not only benefit businesses but also contribute to the growth and sustainability of the MSME sector.
Author Bio
sir,
A Doctor maintained a private hospital with pharmacy stores turnover rs:2 crores yearly tax audit itr filed.purchases of medicines from wholesaler on credit based.
doubt:
15/45 days repayment provision applicable in msme act and sec 43 (B) provisions applicable