Follow Us :

Introduction: The Finance Act 2023 introduced a pivotal amendment to the Income Tax Act of 1961 by adding subsection (h) to Section 43B. This amendment, effective from April 1, 2024, emphasizes timely payments to Micro and Small Enterprises (MSMEs). The section outlines specific criteria for allowable expenses and disallowances, impacting the taxable income computation of enterprises.

As per the amendment;

a. If any amount remained outstanding to MSME supplier as on 31st March which is not paid within 45 days or period agreed between the buyer and supplier in writing, whichever is earlier shall be disallowed;

b. If any amount remained outstanding as on 31st March not paid within 15 days when there is no agreement between buyer and supplier in writing shall be disallowed.

To summarize if any sum payable to micro & small enterprises (supplier) is not paid within time limit as mentioned above; then the expenses is not allowed as deductions while computing the taxable income of an enterprise. Those expenses will be allowed only after the payment is made to the supplier.

Some Important Notes:

  • This amendment takes effect from 1st April, 2024 and will accordingly apply in relation to the assessment year 2024-25 (i.e FY 2023-24) and subsequent assessment years.
  • To identify the enterprise and to ensure the due compliances it is advisable for business entities to take an Annual Declaration from their supplier indicating that they are micro or small enterprises registered under the Micro, Small and Medium Enterprises Development Act, 2006.
  • This section applies to Micro and Small Enterprise only and amount payable to medium enterprises will not be governed by section 43B(h).

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

  • This section is not applicable to those enterprises who show their income under presumptive basis (i. e 44AD/44ADA/44AE).
  • This section is not applicable for dues outstanding in respect of capital expenditure incurred.
  • Though payment is made after 15/45 days but before filing a return of income, the deduction can only be claimed in the year in which actual payment is made and not in the year of accrual.
  • In case there is a dispute between buyer and supplier, in that case as per MSMED Act the day on which such objection is removed by the supplier shall be treated as day of acceptance and the payment has to be made before the appointed day which will be day following immediately after the expiry of the period of fifteen days from the day of acceptance.

Situations:

Sr. No

Situation Allowed / Disallowed
1 Amount outstanding and paid after 15/45 days but before 31st March 2024 Allowed
2 Amount not paid within 15/45 days and is outstanding as on 31st March 2024 Disallowed
3 Amount outstanding on 31st March 2024 but 15/45 days’ period not ended on 31st March 2024 and payment is made in Next FY within prescribed time Allowed
4 Amount outstanding on 31st March 2024 but 15/45 days’ period not ended on 31st March 2024 and payment is not made in Next FY within prescribed time Disallowed

Note: Please refer below flow chart for more clarity about the section 43B(h)

Applicability of Section 43B Clause (h)

Applicability of Section 43B Clause (h)

Conclusion: Section 43B(h) brings a nuanced dimension to the Income Tax Act, emphasizing timely payments to MSMEs and influencing deductible expenses. Understanding its intricacies, exceptions, and impact on various scenarios is crucial for businesses aiming for tax efficiency. As enterprises navigate these amendments, compliance and strategic financial planning become imperative to ensure smooth operations and avoid disallowances in taxable income calculations.

Author Bio

CA Ajay Naval, Partner at VDA & Associates, Pune View Full Profile

My Published Posts

LTC (Leave Travel Concession) Cash Voucer Scheme Statement of Financial Transaction (SFT) and Reportable Account Covid 19 Impact on Residential Status Under Income Tax Act Section 194K TDS on Dividend Income in Respect of Units of Mutual Funds View More Published Posts

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

2 Comments

  1. CA Pramod Jain says:

    Capital Creditors if falls under Micro and Small category will also be excluded.
    However the industry challenge is that if buyer holds the GST amount of MSME vendors being default, then still this section will be applicable.

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Post by Date
April 2024
M T W T F S S
1234567
891011121314
15161718192021
22232425262728
2930