Amendment of section 43B – Delay in payments to MSME & Impact of Budget 2023 on MSME sector 

Amendment of section 43B – Delay in payments to MSME and Impact of Budget 2023 on MSME sector

In Budget 2023, the Government of India tried to boost the growth of MSME sector in India. To encourage the timely payments and to overcome from the problem of shortage of working capital to the MSME sector, they have come with a following amendment in Section 43B of the Act.

In section 43B of the Income-tax Act, with effect from the 1st day of April, 2024, ––

(iii) after clause (g), the following clause shall be inserted, namely:––

“(h) 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, ”;

(iv) in the proviso, after the words “nothing contained in this section”, the brackets, words and letter “[except the provisions of clause (h)]” shall be inserted;

(v) in Explanation 4, ––(I) for clause (e), the following clause shall be substituted, namely:––

‘(e) “micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006;

(II) for clause (g), the following clause shall be substituted, namely:––

‘(g) “small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006.

Analysis-

The newly inserted clause (H) to Section 43B of the Act states that those provisions are applicable only to micro or small enterprises and hence one should understand the meaning of micro and small enterprises.

Micro Enterprise – “micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006;

Section 2(h) of Micro, Small and Medium Enterprises Development Act, 2006 states that “ micro enterprise means an enterprise classified as such under sub clause (i) of clause (a) OR sub-clause (i) of clause (b) of sub-section (1) of Section 7”

As per Section 7(1) (a) (i), In case of an enterprise engaged in the manufacture or production of goods, micro enterprise means those enterprise where investment in plant and machinery does not exceed 25 Lacs.

As per Section 7(1)(b)(i), In case of an enterprise engaged in the providing or rendering of services, micro enterprise means those enterprise where investment in equipment does not exceed 10 Lacs.

However the Ministry of Micro, Small and Medium Enterprises come up with a new definition of micro enterprise by a Notification dated 1^st June 2020, which states that –

a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

Small Enterprise – “small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006;

Section 2(m) of Micro, Small and Medium Enterprises Development Act, 2006 states that “small enterprise means an enterprise classified as such under sub clause (ii) of clause (a) OR sub-clause (ii) of clause (b) of sub-section (1) of Section 7”

As per Section 7(1)(a)(ii), In case of an enterprise engaged in the manufacture or production of goods, small enterprise means those enterprise where investment in plant and machinery is more than 25 lakh rupees but does not exceed 5 Crore rupees.

As per Section 7(1)(b)(ii), In case of an enterprise engaged in the providing or rendering of services, small enterprise means those enterprise where investment in equipment is more than 10 lakh rupees but does not exceed 2 Crore rupees.

However the Ministry of Micro, Small and Medium Enterprises come up with a new definition of micro enterprise by a Notification dated 1^st June 2020, which states that –

a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;

AND

a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees

Section 43B of Income Tax Act, 1961 allows CERTAIN expenditure which is specified in section 43B, if such expenses are actually paid. It means those expenses are not allowed if those are not paid.

By the Finance Bill, 2023 brings new clause (h) to section 43B of the Act, by which any expenditure in related to purchases/services hired from MSME, will be allowed only if such expenditure is paid within the time limit specified in section 15 of Micro, Small and Medium Enterprises Development Act, 2006. If such expenditure is not paid within such time limit, then such expenses will be disallowed.

So here we should know the time limit (period) allowed by Micro, Small and Medium Enterprises Development Act, 2006. Section 15 of Micro, Small and Medium Enterprises Development Act, 2006 which talks about the period within which the buyer has to make payments to MSME. The Section 15 is extracted as below-

Liability of buyer to make payment. —Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make payment therefor 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 forty-five days from the day of acceptance or the day of deemed acceptance.

We can see the two scenarios in the above section. The first one is –

1) When there is a written agreement between the suppler and buyer regarding the payment for goods sold or services rendered.

The provisions of Section 15 of Micro, Small and Medium Enterprises Development Act, 2006, states that the buyer who buys any goods or hires services from MSME, then such buyer has to pay for such goods or services, to MSME, before the date agreed between him and the supplier in writing. However it should be noted that such agreed credit period in writing should not exceed 45 days from the day of acceptance/day of deemed acceptance, in any case.

Here one should know, what is a day of acceptance/day of deemed acceptance?

As per the Explanation to Clause (b) of Section 2 of Micro, Small and Medium Enterprises Development Act, 2006, the day of acceptance means,

a) The day of actual delivery of goods or the day of actual rendering of services.

b) Where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen 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.

And as per the Explanation to Clause (b) of Section 2 of Micro, Small and Medium Enterprises Development Act, 2006, the day of deemed acceptance means,

“the day of deemed acceptance means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services”

For Example- If M/s ABC has purchases goods worth Rs. 90000/- from M/s XYZ (which is a MSME) on 01/01/2023, for which M/s XYZ has given a credit period of 50 days for payment to the buyer.

In above case , As per the provisions of Section 15 of Micro, Small and Medium Enterprises Development Act, 2006, M/s ABC (buyer) has to make a payment of Rs. 90, 000/- to M/s ABC within 45 days from the date of acceptance, even if the credit period is of 50 days.

2) When there is a NO written agreement between the suppler and buyer regarding the payment for goods sold or services rendered.

If there is no written agreement between the suppler and buyer regarding the payment for goods sold or services rendered, then in such cases the provisions of Section 15 of Micro, Small and Medium Enterprises Development Act, 2006, states that the buyer who buys any goods or hires services from MSME, has to pay for such goods or services, to MSME, before the appointed day.

But which day is Appointed Day? As per Section 2(b) of Micro, Small and Medium Enterprises Development Act, 2006, appointed day means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

So again we come back to the amended provisions of Section 43B of Income Tax Act, in a summary-

Section 43B will allow the expenditure for purchases or services hired from MSME, only if it is paid –

1) If there is a written agreement regarding payment between supplier(MSME) and the buyer –

In such a case the buyer has to pay to the supplier (MSME) within a period or before a period specified in the written agreement. However it should be noted that in any circumstances such period shall not exceed 45 days from the day of acceptance/day of deemed acceptance.

2) If there is a NO written agreement regarding payment between supplier(MSME) and the buyer–

If there is no written agreement between the suppler and buyer regarding the payment for goods sold or services rendered, then in such cases the buyer has to pay for such goods or services, to MSME, before the appointed day. (i. e. before the expiry of 15 days from the day of acceptance/day of deemed acceptance)

In short, the buyer has to pay to MSME, before the agreed date (as per written agreement)/ before 45 days/before 15 days from the day of acceptance/day of deemed acceptance. (agreed date/45 days/15 days)

It should be noted that, the proviso to Section 43B (regarding payment of certain expenditure before the due date of furnishing the return of Income) shall not applicable to this newly inserted Section 43B(h) (payment to MSME for expenditure).