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Introduction: The intricacies of income tax deductions often revolve around timely payments and adherence to specific criteria. Section 43B(h) of the Income-tax Act introduces noteworthy provisions related to deductions for payments to Micro and Small Enterprises (MSEs). Understanding the nuances of this section is crucial for businesses availing goods or services from MSEs.

Particulars Details
Introduction The Income-tax Act allows for the deduction of expenses based on the accounting system adopted by the assessee. If the cash system is followed, the deduction is permitted upon actual payment. For those using the mercantile system, the deduction is allowed on an accrual basis.

Section 43B of the Income-tax Act outlines certain expenses eligible for deduction on a payment basis. Even if the assessee follows the mercantile method, specified expenses can be deducted if paid on or before the due date for filing the income return, excluding payments to micro and small enterprises.

In 2023, the Finance Act introduced a new item in Section 43B, specifying that payments to micro or small enterprises (MSEs) beyond the time limit mentioned in the Micro, Small and Medium Enterprises Development Act 2006 will be deductible in the year the payment is made.

Applicability This clause becomes relevant when an enterprise is purchasing goods or availing services from an enterprise registered under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act, 2006).

Importantly, it’s worth noting that the buyer’s registration under the MSMED Act, 2006, is not compulsory.

Effective Date This amendment is made applicable from assessment year (AY) 2024-25, that is, Financial Year (FY) 2023-24.
Micro and Small Enterprises Micro Enterprise:

  • Net investment in plant and machinery or equipment does not exceed Rs 1 crore; and
  • Net turnover does not exceed Rs 5 crores.

Small Enterprise:

  • Net investment in plant and machinery or equipment does not exceed Rs 10 crore; and
  • Net turnover does not exceed Rs 50 crores.

Medium Enterprise:

  • Net investment in plant and machinery or equipment does not exceed Rs 50 crore; and
  • Net turnover does not exceed Rs 250 crores.
Time Limit for MSME payment If a business buys goods or services from a small or medium enterprise (MSME) and there’s no written agreement about when to pay, the business has to make the payment within 15 days.

If there is a written agreement, they must stick to the agreed-upon payment schedule, but it shouldn’t go beyond 45 days.

So, the rule is: pay within 15 days if there’s no agreement, and follow the agreement (up to 45 days) if there is one.

Example
Day of acceptance of any goods or services by a buyer from a supplier Credit period Actual date of payment Deduction allowed in which FY
25/03/2024 60 20/05/2024 2024-25
30/01/2024 15 19/02/2024 2023-24
15/01/2024 05/04/2024 2024-25
28/03/2024 10/04/2024 2024-25
01/03/2024 60 30/04/2024 2024-25
29/03/2024 45 12/05/2024 2023-24
Are the terms specified on an invoice or purchase order regarded as a binding agreement? The MSMED Act doesn’t specifically say what an ‘agreement’ is, so it could be written or spoken. In simple terms, an agreement is like when one person makes an offer, and another person says yes. It includes things like when to pay, accepting what was bought, what happens if payment is late, and how to solve problems. So, if an invoice or purchase order mentions these things, it counts as an agreement.
Will the GST component be disallowed if the sum payable to MSE attracts Section 43B(h) disallowance? If you owe money to a small business and it includes GST, here’s how it works:

  • If you claim GST as a credit in your books, the disallowed amount is only the sum without GST.

Example: If you owe Rs. 100 with Rs. 18 GST, the disallowed part is Rs. 100 (excluding GST).

  • If you don’t claim GST as a credit and treat it as an expense, the deduction is only allowed for the actual payment made.
What happens if an advance is given to a supplier who qualifies as a micro or small enterprise? If you pay money upfront to small businesses, you can deduct that amount from your taxes in the same year, even if it’s not officially due for payment. The Supreme Court has confirmed this deduction rule under Section 43B.
What happens if you pay 50% in advance this year and the remaining 50% to the MSE supplier later on? If the taxpayer pays 50% of the remaining balance during the year, even if it’s after the due date in Section 15 of the MSMED Act, there’s no problem. But if this 50% is still unpaid by the end of the year and is paid later, then disallowance will apply to this part owed to MSEs.

Suppose a business owes Rs. 10,000 to an MSE supplier. They pay Rs. 5,000 (50%) during the fiscal year, even though it’s after the due date mentioned in Section 15 of the MSMED Act. In this case, there’s no issue.

However, if the remaining Rs. 5,000 is still unpaid by the end of the year and is paid later, then disallowance might apply to this Rs. 5,000 owed to the MSE supplier.

What if the cheque is given to the MSEs on or before the due date, but they cash it after the due date? In simple terms, when you give a cheque to someone, it’s considered as payment on that day, as long as the cheque doesn’t bounce later. So, if you hand over a cheque before the due date, even if the recipient cashes it afterward, it’s still treated as payment within the due date.

Conclusion: Section 43B(h) emerges as a critical component in income tax regulations, particularly for businesses engaging with Micro and Small Enterprises. By delving into its provisions, businesses can align their practices with the stipulated guidelines, ensuring compliance, and optimizing deductions. Clear examples and practical insights enhance understanding, allowing businesses to navigate the complexities of MSE payments seamlessly.

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4 Comments

  1. Bhupinder Dixit says:

    I found error inexample no.4 and in applicability this provision is applicable only when goods procured from micro and small enterprises,not from medium enterprises kindly confirm me about the same and make me correct if I am wrong

    1. CS Sanchit Mathur says:

      @Bhupinder Dixit Sir, thanks for your review, I also saw the mistake, yes medium industries are exempt from the scope (in article it is written the registered).

  2. aman garg says:

    can buyer and seller supersede the act by entering into 60 days credit period through written agreement and still claim deduction?

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