Amendment in Section 43B: Impact on MSME Payments and Tax Liability

Introduction: Section 43B of the Income Tax Act, 1961, underwent a significant amendment through the Budget 2023, introducing Clause(h). This clause focuses on payments to micro and small enterprises (MSMEs) and brings about changes in the deduction mechanism.

Section 43B Overview: Section 43B mention some expenses which are allowed as deduction while calculating Income Tax liability only on actual payment. However, the section contains a proviso which states that if the payment is made on or before the date of filing of ITR for the relevant previous year, then also such expenses will be allowed as deduction.

Amendment Overview: Government of India has made amendment in Sec 43B of the Income Tax Act 1961 through Budget 2023 by inserting Clause(h) in the section. As per the clause,  “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 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.”

Also, the proviso to Section 43B is also not applicable to this clause, which means that even if payment is made on or before the due date of filing return for the relevant previous year, the deduction will be allowed in the year in which actual payment is made.

What is the time limit specified under Section 15 of MSME Development Act 2006?

As per Section 15 of MSME Development Act, 2006, Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment thereof

• 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 the buyer in writing shall exceed 45 days from the day of acceptance or the day of deemed acceptance.

As per Sec 2(b) of MSME Development Act, 2006, Appointed day means the day following immediately after the expiry of the period of 15 days from

• the day of acceptance or
• the day of deemed acceptance of any goods or any services by a buyer from a supplier.

As per the explanation to Sec 2(b),

• the day of acceptance means
  • the day of the actual delivery of goods or the rendering of services or
  • where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;
• the day of deemed acceptance means
  • where no objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of service.

In Nutshell, the time limit is 45 days (15 days in case of no agreement) from the date of actual delivery or the date of objection made.

What are the entities which are covered under the ambit of section 43B?

The amendment specifically covers only “Micro and Small enterprises”

It means-

• Medium Enterprises are not covered, thus there is no time limit for making payment to such enterprises.
• Only micro and small enterprises registered under MSMED Act are covered by this provision. The unregistered micro and small enterprises are outside the purview of these amendments.
• As per Office Memorandum No. 5/2(2)/2021-E/P & G/Policy dated 02-07-2021, wholesale and retail trader are entitled for UDYAM registration only for the benefit of Priority Sector Lending only. So, purchase from traders would be outside the purview of these amendments.
• Criteria for Micro or Small enterprises as per MSME Development Act-

How will you identify if your vendor is registered MSME or Not?

Currently, there is no way to directly check whether your vendor is registered MSME or not. Therefore, you directly have to get the Udyam Certificate from your vendor and verify the same on the MSME portal.

If your vendor is not registered on MSME, take a declaration from them stating that he is not registered under MSME.

Also, every Specified company must file MSME-1 return. The MSME-1 is a half-yearly return that needs to be filed regarding outstanding payments to the MSE. The companies need not file a ‘Nil MSME-1 return’ when the company is not a specified company.

What will be the Implications of this amendment?

1. It will result in a ‘timing difference’ and impact deferred tax adjustments to be made as per AS-22 or Ind-As-12 as the case may be.

2. This amendment has cast additional duties and responsibilities on taxpayers as well as auditors.

3. The proposed amendment by the government would ensure timely payments to micro and small enterprises, leading to better working capital management.

4. However, on the flipside, the amendment may also pose a negative consequence for assessees-

i. Tracking and making payments to the contractual suppliers will be a cumbersome exercise that will increase the operational cost of the assessees.

ii. There is also a possibility that businesses want to cut back on or minimize their commercial relationships with MSMEs since they will have to worry about the deduction at year-end.

5. If payment is not made within the prescribed time limit, following will be the consequences

i. Increase in the income tax liability of the buyer in case of non-compliance.

ii. As per Section 16 of MSME Development Act, 2006 where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.

Changes in Bank rate in FY 2022-23: Reference bank rate as changed by RBI

Illustrations to understand the provisions

In summary, the amendment seeks to promote timely payments to micro and small enterprises while introducing complexities and responsibilities for taxpayers and auditors. The illustrations help understand the practical implications of the amended provision.