All about Section 43B (h) of Income Tax Act, 1961 Related to MSME Enterprises

Introduction

In the fiscal landscape of India, Section 43B(h) of the Income Tax Act, 1961, garners significant attention due to its direct implications for Micro, Small, and Medium Enterprises (MSMEs). This provision mandates the timely payment to MSMEs, affecting the tax deductions available to businesses. The article aims to unpack the nuances of Section 43B(h), exploring its applicability, non-applicability, the classification of enterprises under the MSMED Act, 2006, registration procedures, the necessity of submitting MSME certificates, verification of Udyam Registration Numbers, and specific examples illustrating the operational dynamics of this section.

1. Section 43B e. certain deductions to be only on actual payment 

Clause 43B (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, shall be allowed only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

2. Section 15 of MSMED Act, 2006

Section 15 envisages to ensure timely receipt of payment for their goods and services by micro and small enterprises. It casts an obligation upon the buyer of any goods and services, to make the payment to the supplier, by the specified date as follows:

(a) When there is an agreement in writing: In or before the date agreed upon between them in writing  but not later than 45 days from the date of acceptance or the day of deemed acceptance.

(b) When there is no agreement: Before the appointed day, which means the day following immediately after the expiry of 15 days from the day of acceptance or day of deemed acceptance.

Buyer means a person buying any goods or receiving any services from a supplier for consideration.

Supplier means a micro or small enterprise which filed a memorandum under section 8(1) and includes (a) National Small Industries Corporation, (b) Small Industries Development Corporation of a state/Union Territory, and (c) a registered company. Co-operative society, trust or body, selling goods or rendering services produced or provided by micro or small enterprises. 

Day of acceptance means

(a) The day of actual delivery of goods or rendering of services, or

(b) Where the buyer makes any objection in writing within 15 days from the day of delivery of goods or rendering the services, the day on which the supplier removes such objection.

Day of deemed acceptance means the day of actual delivery the goods or rendering the services, where the buyer makes no objection in writing within 15 days from such day.

3. Applicability of section 43B(h) of Income Tax Act, 1961

This section is applicable only for the payment to Micro and Small Enterprises registered under MSMED Act.

4. Non Applicability of section 43B(h) of Income Tax Act, 1961

This section is not applicable on the following persons:

i. If the supplier is not registered under MSMED Act,

ii. If the supplier is registered under the category of Medium Enterprise,

iii. If the supplier is registered under the category of traders under MSMED Act,

iv. If the assessee files the Income tax return under presumptive taxation i.e. section 44AD,44ADA, 44AE 

5. Classification of Enterprises under MSMED Act, 2006

Composite Criteria	Investment in Plant & Machinery or Equipment	Turnover
Micro	Does not exceed 1 crore rupees	Does not exceed 5 crore rupees
Small	Does not exceed 10 crore rupees	Does not exceed 50 crore rupees
Medium	Does not exceed 50 crore rupees	Does not exceed 250 crore rupees

6. Registration process under MSMED Act, 2006

Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof. On registration, an enterprise (referred to as “Udyam” in the Udyam Registration portal) will be assigned a permanent identity number to be known as “Udyam Registration Number”. An e-certificate, namely, “Udyam Registration Certificate” shall be issued on completion of the registration process.

Registration process

(a) The form for registration shall be as provided in the Udyam Registration portal https://udyamregistration.gov.in.

(b) There will be no fee for filing Udyam Registration.

(c) Aadhaar number is mandatory for Udyam Registration.

(d) The Aadhaar number shall be of the proprietor in the case of a proprietorship firm, of the managing partner in the case of a partnership firm and of a karta in the case of a Hindu Undivided Family (HUF).

(e) In case of a company or a limited liability partnership or a cooperative (society or a society or a trust, the organization or its authorized signatory shall provide its GSTIN and PAN along with its Aadhaar number.

Clarification on GSTIN. The Ministry of Micro, Small and Medium Enterprises vide Notification No. S.O. 1055(E), dated 05.03.2021 has amended the previous Notification No. S.O. 2119(E), dated 26.06.2020 to provide that the exemption from the requirement of having GSTIN shall be as per the provisions of the Central Goods and Services Tax Act, 2017. In case of any proprietorship enterprise not registered under any Act or rules of the Central Government or the State Government, the proprietor may use his or her PAN for registration of the enterprise in the Udyam Registration portal and for all other types of enterprises PAN shall be mandatory.

(f) In case an enterprise is duly registered as an Udyam with PAN, any deficiency of information for previous years when it did not have PAN shall be filled up on self-declaration basis.

(g) The enterprises having exports and wanting to avail of the benefits accruing to MSME must provide their PAN. PAN is mandatory w.e.f. 01.04.2021.

(h) In case of a new enterprise having no PAN, Forms has to be filled up on self-declaration basis.

(i) No enterprise shall file more than one Udyam Registration.

(j) Any number of activities including manufacturing or service or both may be specified or added in one Udyam Registration.

7. Format of Draft Request Letter to supplier for Submitting MSME Certificate

It is the duty of the buyer to ask the supplier to submit his MSME Certificate.

Sample Letter sent to all supplier for MSME Registration Certificate  

Dear Vendor,

As part of our ongoing commitment to comply with regulatory requirements and support the growth of Micro, Small, and Medium Enterprises (MSMEs), we are reaching out to all our vendors to update our records in accordance with the MSME Act.

We kindly request that you submit your MSME registration certificate, if you are registered as an MSME, within the next 15 days from the date of this email. This will enable us to provide the necessary support and benefits that are accorded to MSMEs under the relevant regulations and policies.

Please email a copy of your MSME certificate to ensure that the document is legible and the registration number is clearly visible and the updated category is clearly defined in the certificate.

If we do not receive your MSME certificate within the specified timeframe, it will be deemed that your organization is not registered or not eligible as an MSME.

We understand that not all businesses may be registered as MSMEs and this request is only applicable to those who are currently registered under the MSME Act.

We appreciate your prompt attention to this matter and your continued partnership. Should you have any questions or require assistance, please feel free to contact

Thank you for your cooperation.

Regards

Authorized Signatory

8. Verification of Udyam Registration Number

Anyone can verify the Udyam Registration Number to check Section 43B (h) applicability.

The link to access is: https://udyamregistration.gov.in/Udyam_Verify.aspx

9. Examples on Section 43B(h)

Deduction Allowed in Financial Year when payment is made

Invoice Date	Due Date as per MSME Act and as per Section 43B (h) of the Income Tax Act, 1961	Actual Date of Payment	Deduction Allowed in FY
01.03.2024	15.04.2024	18.04.2024	FY 2024-25 Disallowed in FY 2023-24
20.03.2024	04.04.2024	18.04.2024	FY 2024-25 Disallowed in FY 2023-24
01.03.2024	15.04.2024	14.04.2024	FY 2023-24
20.03.2024	04.04.2024	03.04.2024	FY 2023-24
01.03.2024	16.03.2024	01.04.2024	FY 2024-25 Disallowed in FY 2023-24
16.03.2024	31.03.2024	01.04.2024	FY 2024-25 Disallowed in FY 2023-24

Conclusion

Section 43B(h) of the Income Tax Act, 1961, plays a pivotal role in protecting the interests of MSMEs by ensuring they receive payments in a timely manner. Its implications for businesses are significant, necessitating careful financial planning and adherence to statutory deadlines for payments to MSME suppliers. By fostering a culture of prompt payment, this provision not only supports the financial health of MSMEs but also encourages a more disciplined approach to business transactions and tax compliance. Understanding and adhering to the provisions of Section 43B(h) is crucial for businesses to maintain healthy relationships with their MSME partners and ensure compliance with the Income Tax Act.