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Introduction: The Micro, Small, and Medium Enterprise (MSME) sector plays a crucial role in India’s economic landscape. This article delves into the recent amendments to the Income Tax Act (ITA) concerning MSMEs, focusing on key provisions and their implications.

As per Micro, Small and Medium Enterprise Act, 2006, the meaning of Micro, Small and Medium enterprise is as under.

Micro enterprise, means an enterprise or firm classified as such, where its investment in Plant and Machinery does not exceed rupees one crore and turn over does not exceeds five crore rupees. Small enterprise, means an enterprise or firm classified as such, where its investment in plant and machinery does not exceed rupees ten crore and turn over does not exceeds fifty crore rupees.

Enterprise, means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering any service or services.

Under Income Tax Act, 1961, new clause under section 43B, certain deductions to be only on actual payment, new clause (h), inserted after clause (g), by Finance Act, 2023, w. e. f. 1st April, 2024

(h) any sum payable by the assesse to a micro or small enterprise beyond the time limit specified in section 15 the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).

Section 15 of Micro, Small and Medium Enterprises Development Act, 2006 says about Liability of buyer to make payment.

Provisions of Income Tax Act Regarding Micro And Small Enterprise

Where any supplier, supplies any goods or any services to any buyer, the buyer shall make payment therefore on or before the date agreed upon between him and the supplier in writing, or where there is no agreement in this behalf, before the appointed day:

Provided that in no case the period agreed upon between the supplier and buyer in writing shall exceed forty five days from the day of acceptance or the day of deemed acceptance.

In our country, lots of small business men are there, which will cover under definition of micro and small enterprises. Have a look on the following points.

  • Any kind of purchase/expenditure made from Micro and Small enterprise, deduction of this amount under Income Tax Act, will allow only when the payment is made within prescribe time, maximum time is of 45 days.
  • If the contract of credit period is made with supplier and the considered if both are agree to it. Then as per this provision, it should not exceed 45 days.
  • If no contract about time period is made with supplier, under this circumstances time period is presume of 15 days only.
  • If the payment of goods purchased is due for more than 45 days, but if it is paid before 31st March, that amount will get deduction for that financial year.

Take an example: Mr. ‘A’ sold goods to Mr. ‘B’ on 1st January but payment has not made by Mr. ’B’ up to 25th February i.e. within 45 days, so he is not entitled to get deduction. But if Mr. ‘B’ will make payment before 31st March, he is entitled for deduction, because payment is made before the year end.

  • If the payment is made after 45 days, i.e. in next year, then deduction will get in the next year.
  • It is not compulsory that purchaser should be registered under MSME Act, he should be either micro or small enterpriser.
  • These conditions are applicable to all kind of assesse, may be Individual, HUF, Partnership Firm or Company.
  • During the course of scrutiny of an assesse, the assessing officer came to know that, your supplier is Micro or Small enterpriser and payment is made after 45 days, the assessing officer may add this amount in your total income.
  • It is advisable to mention your Udhyam Registration number and your category i.e. micro or small enterpriser in your sale bill, so that purchaser will get status of your MSME.

To understand above provisions easily,  with following illustration:

Mr. ‘A’ has purchased goods worth Rs. 1,00,000 from Mr. ‘B’ on 17th January, 2024. ‘B’ has make payment of Rs. 20,000 on 22nd January, 2024 and Rs. 20,000 on 30th March, 2024. On 31st March, 2024, liability of ‘A’ to pay Rs. 60,000. The liability to pay income tax will be as under:

01. If the due date of payment is 7 days, during these days ‘B’ has paid Rs. 20,000. But before the year end he paid on 30th March Rs. 20,000, so his outstanding amount will be Rs. 60,000 which will be added to the income of ‘B’. If due date is not mentioned in bill then also on 31st March, 2024, outstanding demand is Rs. 60,000, which will be added to the income of ‘B’.

The benefit of registration under MSME are as under:

  • Security for late payment or nonpayment of amount
  • Relief for bank loan
  • Relief of rate of interest for overdraft/cash credit from bank
  • Subsidy for industries
  • Benefit for electricity
  • Benefit for Registration fee for Patent/Trademark
  • Relief for certificate fees.

We know that throughout India Trade Associations are opposing this amendment and request the Finance Minister to delete this amendment or make it applicable from next year.

Conclusion: While the amendments aim to streamline payments to Micro and Small enterprises, the impact on businesses is profound. Adherence to timelines is crucial, and MSME registration offers various benefits. The industry’s request to reconsider or delay the implementation reflects the concerns and complexities faced by small businesses nationwide.

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