Section 43B(h) of Income Tax Act, 1961: A boon or a bane

Introduction: The recently introduced clause (h) in Section 43B of the Income Tax Act, 1961, as part of Finance Minister Nirmala Sitharaman’s Budget 2023-24, brings forth a critical paradigm shift in the taxation landscape. Focused on encouraging timely payments to Micro and Small Enterprises (MSMEs), this clause has profound implications for businesses and professionals.

No deduction In Income Tax until you pay to your MSME Vendors:

In her Budget 2023-24 speech, Finance Minister Nirmala Sitharaman introduced pivotal measures, consequently aiming at incentivizing timely payments to MSMEs. The Finance Bill 2023 has a new insertion of clause (h) to section 43B of the Income Tax Act 1961 which reads as under:

Section 43B (h) of the Income Tax Act, 1961

“Any sum payable by the assessee to a MICRO or SMALL enterprise beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006,”

The above clause indicates that, in order to be eligible to claim a deduction of the sum payable to micro and small enterprises, the payment shall be actually made within the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006.

Section 15 of MSME Development Act, 2006 stipulates that

“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 not exceed forty-five days from the day of acceptance or the day of deemed acceptance”

From the above, it is clear that the buyer shall make the payment to the supplier as agreed between them, however the same cannot exceed 45 days from the date of acceptance or the day of deemed acceptance i.e., from the day of endorsement of the goods/service.  So, in simpler terms, the payment must be made either within the agreed period or 45 days, whichever is earlier.

• Micro Enterprise: Investment less than Rs. 1 crore and Turnover less than Rs. 5 crore.
• Small Enterprise: Investment less than Rs. 10 crore and Turnover less than Rs. 50 crore.

The Negative outcomes:

Unraveling the intricacies of delayed payments unveils a series of adverse repercussions for buyers. When a buyer neglects to fulfill payment obligations under section 15, the consequence is the imposition of compound interest at a rate three times the Reserve Bank’s notified bank rate, accruing monthly. This obligation overrides any prior agreements or prevailing laws, making it a stringent requirement.

Moreover, the fallout extends to Micro, Small, and Medium Enterprises (MSMEs). According to Section 23 of the MSME Development Act, 2006, any interest paid by the buyer in line with the Act is rendered non-deductible for income computation under the Income-tax Act, 1961. This dual regulatory framework imposes financial constraints on buyers, accentuating the importance of timely payments.

In addition, failure to meet payment deadlines stipulated in Section 15 of the MSME Development Act, 2006, triggers disallowance of expenditure. Any sum owed for expenses or purchases from a registered micro or small enterprise becomes non-deductible if not settled within the specified timeframe. This not only underscores the legal repercussions but also emphasizes the significance of prompt financial transactions in fostering a healthy buyer-supplier relationship.

The effective date for the applicability of clause (h) of Section 43B would be from 1^st  April, 2024.

This has to be interpreted as any outstanding sum payable to the micro & small enterprises as on the last day of financial year 2023-24 and onwards remaining unpaid beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006 shall be disallowed and added back to the income as computed under section 28 of the Income Tax Act, 1961 from 1st April 2024.

Implications: This amendment has far-reaching and serious implications for various business or professional entities. It empowers MSME’s and shifts gears towards their stronger liquidity but at the same time this can lead to a situation where the businesses or professions, by reason beyond their control, having not been able to make payment to such Micro or Small enterprises in time will be saddled with huge income tax liability which consequently may lead to further default in payment to such Micro or Small enterprises. This amendment hits even harder when the seller himself proposes a credit of more than 45 days to promote their business or for any other reason. The amendment, though stated to be in the interests of Micro and Small enterprises, but may lead to many business enterprises becoming sick or unviable in the view of the huge additional tax such business entities getting exposed to.

Keeping in view these serious implications, The Income Tax Bar Association (ITBA) and All Gujarat Federation of Tax Consultants (AGFTC) have jointly made a Representation before Hon’ble Finance Minister Nirmala Sitharaman for the Rationalization of Disallowance for Delayed Payments to MSME under the Income Tax Act, 1961.