Section 43B(h) of the Income Tax Act, 1961 is a new provision that was introduced by the Finance Act 2023 to ensure timely payments to micro and small enterprises (MSEs). This provision underscores the importance of timely payments to MSEs, addressing the longstanding issue of delayed payments and its detrimental impact on their cash flows and operations.
What is Section 43B(h)?
Section 43B(h) states that any sum payable by an assessee to an MSE beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) shall be allowed as a deduction only in the previous year in which such sum is actually paid by the assessee. In other words, if an assessee fails to pay an MSE within the stipulated time limit, the corresponding expense will not be deductible in the year of accrual, but only in the year of payment.
The time limit specified in Section 15 of the MSMED Act is as follows:
- For goods supplied or services rendered by an MSE, the buyer shall make payment on or before the agreed date between him and the supplier in writing or, where there is no agreement in writing, before the appointed day. The appointed day means the day following immediately after the expiry 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.
- Where any buyer fails to make payment of the amount to the supplier, as required under Section 15, he shall 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
- As per Section 15 of the MSMED Act, payments to micro and small enterprises must be made within the time specified in the written agreement, which cannot exceed 45 days. If there is no written agreement, the payments must be made within 15 days. Any payments made beyond these time limits are subject to the conditions of the newly inserted clause (h) in Section 43B, where deductions are allowed only on actual payment.
- In terms of Sec. 15 of the MSMED Act, payment terms cannot exceed 45 days. Hence, in a scenario where the payment terms have been set beyond 45 days (say, 60 days), then it shall be restricted to 45 days and due date shall be ascertained accordingly.
Who are MSEs?
MSEs are enterprises engaged in the manufacture or production of goods or services as defined under Section 2(e) of the MSMED Act. The classification of MSEs is based on their investment in plant and machinery or equipment and turnover, as per the notification dated 26th June 2020:
- A micro enterprise is one where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees.
- A small enterprise is one where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees.
How to identify MSEs?
An assessee can identify whether its supplier is an MSE by checking its registration under Udyam Registration Portal (www.udyamregistration.gov.in). The portal provides a certificate of registration to every enterprise that registers itself as an MSE. The certificate contains a unique Udyam Registration Number (URN) and other details of the enterprise. The portal also allows verification of URN and other information of MSEs.
What are the implications of Section 43B(h)?
Section 43B(h) has significant implications for both assessees and MSEs. For assessees, it means that they have to ensure timely payments to their MSE suppliers, failing which they will lose tax benefits on such expenses. For MSEs, it means that they can expect faster payments from their customers, improving their working capital and cash flow situation.
Illustrations:
1. Suppose A Ltd. is a company engaged in manufacturing and selling electronic goods. It purchases raw materials worth Rs. 10 lakhs from B Ltd., an MSE registered under Udyam Registration Portal, on 1st April 2023. The payment terms are 30 days from the date of A Ltd. makes payment to B Ltd. on 15th June 2024.
As per Section 43B(h), A Ltd. cannot claim deduction for Rs. 10 lakhs in the previous year 2023-24, as it has not paid B Ltd. within the time limit specified in Section 15 of the MSMED Act (i.e., before 1st May 2023). A Ltd. can claim deduction for Rs. 10 lakhs only in the previous year 2024-25, when it actually makes payment to B Ltd.
Moreover, A Ltd. is also liable to pay compound interest at three times of the bank rate to B Ltd. on Rs. 10 lakhs from 2nd May 2023 to 15th June 2024, as per Section 16 of the MSMED Act.
2. Suppose C Ltd. is a company engaged in providing software services. It receives services worth Rs. 5 lakhs from D Ltd., an MSE registered under Udyam Registration Portal, on 1st July 2023. There is no written agreement between them regarding the payment terms. C Ltd. makes payment to D Ltd. on 31st August 2024.
As per Section 43B(h), C Ltd. cannot claim deduction for Rs. 5 lakhs in the previous year 2023-24, as it has not paid D Ltd. within the time limit specified in Section 15 of the MSMED Act (i.e., before 16th July 2023). C Ltd. can claim deduction for Rs. 5 lakhs only in the previous year 2024-25, when it actually makes payment to D Ltd.
Moreover, C Ltd. is also liable to pay compound interest at three times of the bank rate to D Ltd. on Rs. 5 lakhs from 17th July 2023 to 31st August 2024, as per Section 16 of the MSMED Act.
APPLICABILITY
The Bill provides that this amendment will take effect from 1st April, 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years. It means the proposed amendment will apply to payments falling due on or after 1st April, 2024 and not to the unpaid amounts brought forward from past years on 1st April, 2024.
Conclusion: Section 43B(h) represents a critical step towards ensuring the financial stability of MSEs by enforcing timely payments from their clients. Businesses must adapt their payment processes to comply with this provision, thereby fostering a more supportive ecosystem for MSEs. This provision not only enhances the operational efficiency of MSEs but also ensures that they remain vital contributors to the economy. With its implementation from April 1, 2024, both assessees and MSEs must prepare to navigate the implications of this landmark amendment for the assessment year 2024-25 and beyond.
Author Bio
Your example not correct as you can claim deduction previous year itself – FY 23-24 if payment made with in year even after 15/45 days…you are stating that deduction can be claimed next year —not correct.
Thank you for providing additional clarification. I apologize for any confusion. In both examples, it is explicitly stated that the payment is received in the next financial year. Consequently, it can only be claimed in the year of payment. In both scenarios presented, the payment for FY 2023-2024 is made in the subsequent FY 2024-25, hence the claim can only be processed in FY 2024-25. Your understanding of the timeline is accurate. If there are any further questions or concerns, please feel free to let me know.
Thanku Sir.. 😁
Very Informative…!