Repercussions of Delayed Payment To Micro And Small Enterprises- FAQs
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 contains provisions to deal with cases of delayed payment to Micro and Small Enterprises (MSEs).
The Finance Act 2023 inserted a new clause (h) to section 43B of the Income Tax Act, applicable from assessment year 2024-25. It brings a significant change in timely payment to Micro & Small enterprises. The delayed payments to MSEs will hurt the determination of total income for the financial year 2023-24.
As per Section 43B(h) of the Income Tax Act, “any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the MSEMD Act, 2006″ shall be allowed only in the previous year in which such sum is paid.
Frequently Asked Questions: Let us try to understand the salient features of this clause with the help of FAQ (Frequently Asked Questions) and Illustrations.
Q.1 What is the definition of Micro or Small enterprises?
Ans: A micro enterprise is a unit where the investment in plant and equipment does not exceed Rs.1 crore rupees and turnover does not exceed Rs 5 crores. If a micro-enterprise exceeds either the investment or turnover, then it enters the next criteria of a small enterprise with an investment of 10 crores and a turnover of Rs 50 crores.
If any one of the twin conditions of investment and turnover is crossed, the enterprise goes out of the criteria and loses the benefits.
Q2. What is the time limit specified in Section 15 of the MSMED Act 2006 or other words, what is the specified time limit of payment for Section 43B(h)?
Ans:: Section 15 of the MSMED Act 2006 mandates payments to micro and small enterprises within 45 days (of purchased or services availed) in case of written agreement and 15 days in case of no written agreements.
Q3. What if the agreed credit period between the buyer and the supplier is for more than 45 days?
The delay beyond 45 days can result in compound interest obligations to the supplier at three times the RBI notified rate. It is because the MSMED Act overrides the provisions of any other Act or Contract.
As per proviso to section 15 of the MSMED Act, in no case, the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
Illustration: M/S Kundra Agency is registered under the MSMED Act as a Small enterprise and supplied goods to Mr. Anupam on 26th Jan 2024. The payment term as per the written agreement is 60 days from the date of rendering services. Even then Mr. Anupam , the buyer is liable to make payment to him within 45 days i.e. by 01st March 2024 under Section 15 of the MSMED Act.
Q4. What is the time limit in case the buyer has an objection about the quality of goods/services provided by the supplier (SME)?
Ans: Section 2(b) of the MSMED Act mandated payments immediately after the expiry of 15 days / 45 days from the day of acceptance of goods or services. It means
If the buyer objects to acceptance of goods/services, the counting of days will not take place until the supplier removes the objection
The time would start ticking again from the day on which such objection was so removed by the supplier.
Q5. Whether section 43B(h) is applicable in respect of purchases from traders also? In other words, the micro and small enterprises are manufacturers and service providers or it cover traders also?
Ans: Enterprise means an industrial undertaking or a business concern or any other establishment, engaged in the manufacture or production of goods or engaged in providing or rendering any service or services”.
It means an enterprise that is engaged in trading is not covered by the term “enterprise and thus section 43B(h) is not applicable concerning purchases from traders.
Q6. What will happen, if payment to MSE enterprises is not made till 31st March of the financial year i.e. 31st March 2024?
Ans: The amount will be disallowed and become taxable income for the assessee in that financial year (2023-24). However, the assessee can claim a deduction in the previous year when the payment is made.
Q7. Is there any interest also applicable for delayed payments to MSE enterprises?
Ans: Non-compliance with sec 43B(h) can result in compound interest obligations to the supplier at three times the RBI-notified Bank Interest. Interest incurred for delayed payment to Micro & Small Enterprises is considered penal interest and is not allowed under Section 37 of the Income Tax Act. Even if not demanded by the supplier, the buyer is obligated to pay compound interest at monthly rests.
Illustration: M/S Kundra Agency a small enterprise supplied goods to Mr. Anupam on 26th Jan 2024 and the payment was credited to the supplier’s account on 25th March 2024.
Since the amount is not pending payment as of 31st March 2024, it will not be disallowed under the Income Tax Act. However, the buyer is obligated to pay interest at three times the RBI-Notified interest rate for the period from the 46th day from the date of goods supplied.
Q8. Whether the provision apply to the taxpayers who opt for presumptive income determination under section 44AD?
Ans: The disallowance contained in section 43B will not apply for the reason that the presumptive income determination subsumes “anything contrary contained in sections 28 to 43C”. Thus, taxpayers having turnover up to Rs.2 crores may take shelter by opting for section 44AD provisions.
Q9. Whether the provision also applicable to the amount due before 01.04.2023?
Ans: No, the provisions shall not apply for any outstanding before 1-4-2023. Any liability that was outstanding in respect of the period before 01.04.2023 would not be hit by clause (h) of section 43B even if it is outstanding as of 31st March 2024 or even subsequent periods.
Q10. What is to be done if the due date for payment for March is still not exhausted as of 31 March, but the payment is still not discharged?
Ans: Clause (h) to section 43B of the Act will allow such payments on an accrual basis subject to the fact that in the next financial year, payment is made within the time mandated under section 15 of the MSMED Act.
In case the same is not paid within the time prescribed, then the deduction will have to be taken in the year in which the actual payment is made, which is next year.
This is similar to the other dues for March. The tax Auditor has to verify the outstanding dues as of 31 March and verify whether the same is paid within the time specified
Illustration: Mr. Anupam purchased goods from Kundra Agency on 20th March 2024and the due date as per section 15 of MSMED Act is not exhausted on 31st March 2024, he can claim a deduction in FY 2023-24 on an accrual basis.
In the above illustration, if the payment is made on 15th July 2024, the deduction can be claimed in the year 2024-25 as no amount is pending as of 31st March 2025. In such case, an interest at three times the RBI-Notified interest rate for the period from the 46th day from 20th March till the date of actual payment is to be levied in the FY 2024-25.
Q11. If a Trader is registered in MSME and is purchasing material from an MSME registered Dealer or Manufacturer then the purchase Trader is covered under this provision?
Ans: There is no such exclusion of MSME buyers from clause (h) of section 43B of the Act.
Q12. Whether an individual service provider without an undertaking/concern/establishment would qualify as an enterprise?
Ans: No. The service provider should be an industrial undertaking a business concern or any other establishment to fall under the definition of “enterprise”. An individual service provider without an undertaking/concern/establishment would not qualify as an enterprise.
Thus, a CA of the firm of CA having an office shall be an enterprise. However, an individual practicing without an establishment will not be a service enterprise
Thus, the tax professionals in practice with an establishment can avail benefits even of Chapter V i.e. delayed payments.
Q13. Is it mandatory for an MSE enterprise to get registered as an MSME to avail of the benefit of Sec 43B(h)?
Ans. Yes, Section 8 of the MEME Act, 2006 says that any person who intends to establish a small or micro-enterprise, may, at his discretion file a memorandum with such authority as may be specified by the State Government for the purpose.
Thus, those enterprises not registered under the MSME Act are not to be considered for disallowance under section 43B(h)
Q14. How a buyer would know the status of the supplier under the MSMED Act unless informed by it or inquired by the buyer?
Ans: The Micro and Small Enterprises are required to mention/ get printed on their letterheads, supply order sheets, invoices, bills, and other relevant documents, the Entrepreneurs Memorandum (EM) Number so that there always remains an identification of being an MSE supplier: – Advisory issued by the Govt. vide Office memorandum No. No.2(18)/2007-MSME (pol), dt. 26-08-2008
Q15. What if the expenses for which the payment is due are not debited to the P/L account and are capitalized in the books as an asset?
Ans: Section 43B(h) will not impact those assessees who are availing goods/services of the SMEs, not debited to the P/L account but capitalized as an asset in the financials. This provision is applicable only on items that are to be claimed as a deduction in the computation of business income.
Conclusion: The taxpayers shall take precautionary measures to avoid disallowance of expenditure that may be outstanding (to MSME units) as of 31st March 2024 representing the expenditures of the financial year 2023-24.
The purchases made in the last 15 days of the previous year will have to be checked carefully for disallowance. e.g. the payment for the last purchase on 31st March will have to be paid on or before 15th April or 15th May (without agreement or with agreement) as the case may be.
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Disclaimer: The article is for educational purposes only and the answers to frequently asked questions are based on the author’s understanding of the section 43B(h) of Income Tax Act.
The author can be approached at [email protected]
Author Bio
assessess professional income sec 44ada provision itr returns filed every year
doubt:
1.disallowance under sec 43 (b) provision applicable for sec 44ada
2.creditors for cash and trade both transaction applicable sec 43(b)
Dis allowance under sec 43B (h) not applicable for Sec 44ADA.
The section applicable for both cash and trade transactions.