Simplifying Tax Changes: How Small Businesses Can Navigate Section 43B Amendments
In recent legislative changes, the Income Tax Act has been amended to promote prompt payments to Micro and Small Enterprises (MSMEs). This amendment, effective from the Assessment Year 2024-25 onwards, underscores the significance of timely settlements between buyers and MSME suppliers.
The revised Section 43B introduces clause (h), emphasizing that any sum payable by an 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 (MSMED Act) shall not be allowed as a deduction in the year in which the payment is due. Instead, such deductions will be permitted in the year when the payment is actually made.
Classification of MSME
| BASIS | MICRO | SMALL | MEDIUM |
| Investment in Plant, Machinery, or equipment. |
Not More than 1 Cr | Not more than 10 Cr. | Not more than 50 Cr |
| Turnover | Upto 5 Cr Annually | Upto 50 Cr. Annually | Upto 250 Cr Annually |
Understanding the Impact:
The primary objective of this amendment is to ensure that MSMEs receive timely payments for goods supplied or services rendered. However, it places additional responsibilities on buyers to adhere to the payment timelines stipulated under the MSMED Act.
Key Takeaways:
- Compliance with Payment Timelines
- Documentation and Record-Keeping
- Verification of Supplier Registration
- Impact on Tax Liability
These changes have raised several questions among taxpayers regarding their implications and practical application. Here, below trying to address these queries through a series of frequently asked questions (FAQs) to provide clarity on the amended provisions.
The Impact of the amendment is explained with the following example
| Case | Supply/bill received on | Payment to be made as per MSMED Act 2006 | Actual date of payment | Consequence |
| 1 | 25-03-2024 | – If written agreement, payment to be made within 45 days i.e. by 09/05/2024. – If no written agreement, payment to be made within 15 days i.e. by 09/04/ 2024. |
28-03-2024 | No impact as there would be no outstanding as on 31st March 2024. |
| 2 | 25-03-2024 | – If written agreement, payment to be made within 45 days i.e. by 09/05/2024. – If no written agreement, payment to be made within 15 days i.e. by 09/04/ 2024. |
30-04-2024 | –No Impact as payment is made by specified time. –Would be disallowed for AY 2024-25 as payment made after specified date and will be allowed as a deduction in AY 2025-26 |
| 3 | 25-03-2024 | – If written agreement, payment to be made within 45 days i.e. by 09/05/2024. – If no written agreement, payment to be made within 15 days i.e. by 09/04/ 2024. |
15-05-2024 | Would be disallowed for AY 2024-25 as payment made after specified date and will be allowed as a deduction in AY 2025-26 |
FAQs:
Q1: When do the amendments to Section 43B come into effect?
The amendments are effective from the Assessment Year 2024-25, corresponding to the financial year 2023-24.
Q2: What is the significance of clause (h) in Section 43B?
Clause (h) stipulates that any sum payable by an assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the MSMED Act will not be allowed as a deduction in the year when the payment is due. Instead, deductions will be permitted in the year when the payment is actually made.
Q3: How can buyers ensure compliance with payment timelines?
Buyers must ensure that payments to MSME suppliers are made within the specified time frame, as per agreements or statutory provisions.
Q4: Is verification of supplier registration necessary for compliance?
Yes, buyers should verify the MSME registration status of their suppliers to determine the applicability of Section 43B(h) disallowances.
Q5: What are the potential consequences of non-compliance with payment timelines?
Failure to adhere to payment timelines may lead to disallowances under the Income Tax Act, resulting in increased taxable income and higher tax liability for buyers.
Q6: Can businesses claim deductions for payments made after the due date but before filing the return of income?
As per the amended provisions, deductions can only be claimed in the year when the actual payment is made, irrespective of the filing date of the income tax return.
Q7: To attract the disallowance u/s 43B(h), is it mandatory that supplier should have registration under MSMED Act?
Only those micro and small businesses that are registered under the MSMED Act, 2006, as determined by a combined interpretation of section 15 and section 2(n), will be taken into account for the purposes of section 43B’s applicability (h). A supplier’s right to disallowance under Section 43B(h) for unpaid invoices cannot be used if they are not registered under the MSMED Act of 2006.
Q8: Whether section 43B(h) is applicable for dues outstanding to traders having MSME registration?
Traders are not included in the concept of enterprise. Hence, debts owed to dealers are not covered by Sec 43B(h).
Udyam’s registration for retail and wholesale trade has been approved by the Ministry of Micro, Small, and Medium Enterprises via Office Memorandum (OM) No. 5/2(2)/2021-E/P & G/Policy, dated July 2, 2021. Benefits for MSMEs involved in retail and wholesale trade, however, are limited to Priority Sector Lending.
Conclusion:
The amended provisions of Section 43B underscore the importance of timely payments to MSMEs and highlight the government’s commitment to supporting small businesses. By adhering to payment timelines and ensuring compliance with regulatory requirements, businesses can contribute to the sustainable growth of MSMEs while mitigating tax-related risks.
These FAQs provide clarity on the practical implications of the amendments, enabling taxpayers to navigate the regulatory landscape effectively and foster mutually beneficial relationships with MSME partners.
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What will be the position of a registered small enterprise which is selling some items not manufactured by it.
More over what will be the position regarding CAs and advocates who get registered under the act as a small or micro enterprise.
Pl check reply in Q 8
Applicable to tradersa..?
The views are based on my personal interpretation based on the following argument –
Here “enterprise” means and 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 of any service or service(s)”
Only the Micro and Small Enterprises engaged in the:
production or manufacture of goods, in any manner, pertaining to any industry as specified in the First Schedule to the Industries (Development and Regulation) Act 1951 or
providing / rendering service(s) will be covered. Traders / distributors / retailers / distributors etc of goods are not covered by the stringent provisions of Sec 43B(h)
Yes, traders are allowed to get MSME, but benefit limits to priority sector lending only.
Alternate view can be ,to safeguard against future notices to make timely payments to traders as well to be able to claim the expense of the deduction.