Section 43B(h) of the Income Tax Act in India, which was introduced by the Finance Act 2023, is specifically designed to ensure timely payments to Micro and Small Enterprises (MSEs). This guide provides insights into the key points of this section, its applicability, effective date, payment deadlines, and deduction criteria. Additionally, it outlines steps for businesses to verify the MSE status of their suppliers and offers practical strategies to encourage prompt payments to MSEs. Here’s a summary of the key points:
- Applicability: This section applies to any sum owed by an assessee to an MSE for goods supplied or services rendered. To claim a deduction in the same year, the payment must be made within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
- Effective Date: The clause is effective from April 1, 2024, and is applicable from the assessment year 2024-25.
- Payment Deadline: As per Section 15 of the MSMED Act, businesses are required to pay MSEs within 45 days of the acceptance of goods or services. If there’s a written agreement, the payment terms should not exceed 45 days.
- Turnover Limit for MSEs: Micro Enterprises are those with an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises should have an investment not exceeding 10 Crores and turnover not exceeding 50 Crores.
- Deduction on Actual Payment: Any sum payable beyond the time limit specified will be allowed as a deduction only in the year in which the sum has been actually paid.
How can businesses verify if a supplier qualifies as an MSE?
Businesses can verify if a supplier qualifies as a Micro, Small, or Medium Enterprise (MSE) in India through the following steps:
1. Udyam Registration Portal: Visit the official Udyam Registration Portal. This portal is maintained by the Ministry of Micro, Small and Medium Enterprises and provides a platform for MSEs to register and obtain a unique Udyam Registration Number.
2. Verification Process: On the portal, there is an option to ‘Print/Verify’. Click on this and then select ‘Verify Udyam Registration Number’. You will need to enter the 19-digit Udyam Registration/Reference Number of the supplier, which is case sensitive.
3. Captcha Code: Enter the valid Verification Code as displayed in the Captcha Image on the portal.
4. Final Verification: After entering the details, click on the ‘Verify’ button to check the status of the MSE registration.
Additionally, if you have the supplier’s PAN number, you can also check the MSME registration status through the PAN number on the official MSME portal.
These steps ensure that businesses can confirm the MSE status of their suppliers, which is crucial for compliance with Section 43B(h) of the Income Tax Act regarding timely payments to MSEs.
How can businesses encourage timely payments to MSE suppliers?
Businesses can encourage timely payments to Micro and Small Enterprise (MSE) suppliers by implementing the following practices:
1. Clear Payment Terms: Establish clear payment terms with MSE suppliers, ensuring they align with the 45-day payment rule as per the MSMED Act.
2. Formal Contracts: Draw up formal contracts with vendors and suppliers to avoid payment disputes and clarify the consequences of late payments.
3. Prompt Payment Policies: Develop internal policies that prioritize the prompt payment of invoices, especially for MSE suppliers.
4. Automated Payment Systems: Utilize automated payment systems to schedule and execute payments on time, reducing the risk of human error or oversight.
5. Financial Planning: Improve financial planning to ensure sufficient cash flow is available to meet payment obligations on time.
6. Vendor Management Software: Implement vendor management software that can track payment cycles and alert when payments are due.
7. Incentives for Early Payment: Offer incentives for early payment, such as discounts, to encourage buyers to settle their dues ahead of the deadline.
8. Penalties for Late Payment: Impose penalties for late payments to deter buyers from delaying payments to MSE suppliers.
9. Regular Communication: Maintain regular communication with suppliers regarding payment schedules and any potential delays.
10. Education and Awareness: Educate staff about the importance of MSEs and the impact of timely payments on their sustainability.
Conclusion: Compliance with Section 43B(h) is essential for businesses to support the growth and sustainability of Micro and Small Enterprises (MSEs) while adhering to legal obligations. By understanding the provisions of this section, verifying the MSE status of suppliers, and implementing best practices for timely payments, businesses can foster stronger relationships with MSEs and contribute to a thriving ecosystem for small-scale enterprises in India.
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