Introduction: Section 43B(h) of the Income Tax Act, introduced by the Finance Act 2023, has significant implications for taxpayers, particularly regarding payments to micro and small enterprises (MSEs). Understanding its practical intricacies is crucial for tax compliance and optimization.
Section 43B(h) reproduced here:
“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), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.”
The Income-tax Act allows the deduction of expenditure according to the system of accounting followed by the assessee. Where the assessee follows a cash system of accounting, the deduction should be allowed on an actual payment basis. In the case of a mercantile system of accounting, the deduction is allowed on an accrual basis.
However, Section 43B of the Income-tax Act, 1961(IT Act) provides a list of several expenses which are allowed as a deduction on a payment basis. Thus, even if an assessee follows the mercantile method of accounting, deduction of the specified expenses shall be allowed if the payment is made on or before the due date of furnishing the return of income, except the sum payable to micro and small enterprises.
The Finance Act 2023 added one more item to the list in Section 43B by virtue of clause (h), the deduction of which shall be allowed on a payment basis. It provides that any sum payable to a micro or small enterprise (MSEs) beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) shall be allowed as a deduction in the previous year in which such sum is actually paid.
Here, we would discuss the implication above provision in practical manner for the benefit of all in question answers way?
Q.1 From which Financial Year the said provision is applicable?
Ans: This provision is applicable from Financial Year 2023-2024.
Q.2 To whom this provision is applicable?
Ans: Section 43B start with “notwithstanding anything contained in any other provision of this Act”. Therefore, prima facia it looks this provision overrides all provision of the Act. However, section 44AD, 44ADA, 44AE, 44BBB, 115VA also start with non-obstante clauses of “notwithstanding anything contained in any other provision of this Act”. Therefore, Section 43B(h) do not apply to section 44AD, 44ADA, 44AE, 44BBB, 115VA. In all other cases this provision is applicable.
Q.3 What does this provision says?
Ans: As per this provision “Payment to Micro and Small Enterprises if not made on or before the due date as agreed by both parties, which in any case shall not exceed 45 days. If no payment agreement or terms are decided between the parties within 15 Days then such purchases are not allowed as purchase expense for that year; it will be allowed in the year of actual payment.”
Example:- Goa Manufacturing (GM) has purchased Material from Mumbai Industries (MI) on 15.05.2023 of INR 12,00,000, MI is registered as Small enterprises under MSME Act. Kindly discuss various situations for disallowance in AY 2024-2025
| Sr.No | Situation | Due Date | Actual Payment date | Whether disallowed us 43Bh |
| 1 | Payment to MI before Due date | 29.06.2023 | 20.06.2023 | NO Disallowance |
| 2 | Payment to MI on Due date | 29.06.2023 | 29.06.2023 | NO Disallowance |
| 3 | Payment to MI after Due date but within same year | 29.06.2023 | 31.12.2023 | NO Disallowance |
| 4 | Payment to MI after Due date and in next year | 29.06.2023 | 10.04.2024 | Disallowance |
Q.4 Whether this provision is applicable for purchases from Traders?
Ans: Initially Traders were not eligible to register themselves under MSME Act. Later, Traders were allowed to register themselves under MSME Act as per Office Memorandum 5/2(2)/2020/E/P&G/POLICY dated 2-7-2021 and 1/4(1)/2021- P&G Policy, dated 01.09.2021. Further it was clarified that “the benefit to Retail and wholesale trade MSMEs are restricted up to priority sector lending only and other benefit, including provisions of delayed payment as per MSMED Act, 2006, are excluded.
Therefore, Payment to Traders do not attract provision of section 43B(h).
Q.5 What would be the amount of Disallowance? Is it net purchase value or Gross Purchase value including GST?
Ans: Here It is important part to understand that, if GST is claimed as Input Tax Credit (ITC) then only net amount of purchase is eligible for this section and on the other hand if no ITC was claimed on such purchases then Gross Purchase Value would be labile for disallowance. That means whatever amount you are claiming as expenses in to Profit and Loss Account will only be liable for disallowance u\s 43B(h)
Q.6 Whether Capital Expenditure for purchase of Fixed Assets would also be covered u\s 43B(h)?
Ans: Capital Assets is not the expenditure charged to profit and loss Account as per section 30 to 36 of Income Tax Act, it is accounted as Fixed Assets and Depreciation on such asset is charged to Profit and Loss account. Therefore, section 43B(h) is not applicable to such purchases.
However in case of Scientific Research Institutes who are eligible to claim 100% capital expenditure as expenses are liable for section 43B(h).
Q.7 If the assessee is Trader whether he is liable to make the payment to Micro and Small Enterprises within 45 Days?
Ans: Yes, Trader is covered under income tax Act and provision of section 43B(h) is applicable to him pari passu as applicable to any other assessee except discussed in Question No.02. The Irony is “Traders is required to make the payment to Micro and Small Enterprises within 45 days of purchases, but he is not suppose to receive the payment from other enterprises in 45 Days.
Q.8 What we are suppose to do in Order to Comply with Section 43B(h)
Ans: Asseessee simply need to follow below steps in order to comply with section 43B(h)
1. Get the status of Creditor or Vendor under MSME Act, 2006 for FY 2023-24 and if Creditor is Micro or Small Enterprises then;
2. Purchases from 01/04/2023 to 15/02/2024 to be paid as per terms of payment but not exceeding 31/03/2024. And;
3. Purchases from 16/02/2024 to 31/03/2024 to be paid as per terms of payment, but not exceeding 45 days from the date of receipt of Goods or Services.
4. If the Status of the Creditor is Medium Enterprises or Trader, Payment for purchase of Goods or Services can be made as per terms of payment.
In Conclusion Government want payment to MSME Enterprises shall be done on time, in order to smoothly functioning of MSME business, which also has one negative site that Big Companies would prefer purchases from other big companies who is Medium or Large which do not fall under this provision, which ultimately may result in to losing on business from Large Company. Hope the above questionnaires has answered practical issues to maximum extent, if any other queries you can ask in comment, will try to answer the same at the earliest.
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