Introduction: The Finance Act, 2023, marks a pivotal shift in the tax landscape with the introduction of clause (h) in Section 43B of the Income Tax Act, 1961. Effective from the Assessment Year (AY) 2024-25, corresponding to the financial year (FY) 2023-24, this amendment aims to bolster the financial health and operational sustainability of Micro, Small and Medium Enterprises (MSMEs) in India. This article delves into the intricacies of the new provision, its implications for taxpayers, and the broader impact on the MSME ecosystem.

  • The intention of the government is to promote MSMEs thereby with introduction of section 43B (h) in the Act signifies a positive step towards ensuring timely payments to MSMEs. By disallowing deductions for expenses unless payment is made within the specified time limit, it incentivizes larger organizations and taxpayers to fulfil payment obligations promptly.
  • While this provision will require taxpayers to be more diligent in their financial planning and cash management, it will benefit the overall growth and sustainability of MSMEs. Timely payments can improve the working capital cycle for MSMEs, enabling further investment and growth.
  • The revised Section 43B introduces clause (h), emphasizing that any sum payable by an assessed to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) shall not be allowed as a deduction in the year in which the payment is due. Instead, such deductions will be permitted in the year in which the payment is made.
  • At this juncture, it would be pertinent to note that where an enterprise satisfies the below conditions, they can register themselves as MSMEs:
Particulars Investment in Plant and Machinery Annual Turnover
Micro Enterprises Does not exceed 1cr Does not exceed 5cr
Small Enterprises Does not exceed 5cr Does not exceed 50cr
Medium Enterprises Does not exceed 50cr Does not exceed 250cr
  • Section 15 of MSMED Act states that as agreed between the buyer and supplier the payment must be paid within forty-five days from the acceptance date or from the day of the deemed acceptance. However, where there is no agreement, the payment must be made within 15 days from the day of acceptance or the day of deemed acceptance of the goods or services.
  • It would be pertinent to note that if the buyer makes payment to the supplier after 15/45 days, but before the end of the financial year, in such a situation, a deduction can be claimed in a same financial year as payment is made in the same year.
  • Since the benefit of the deduction is only available to the registered MSMEs, the buyers must ensure that the vendor is a registered MSME. The same can be confirmed by obtaining a certificate from their vendors.
  • In case of Capital expenditure or in case where expense has not been claimed as expenditure then disallowance under section 43B of the Act shall not be attracted.
  • The above provisions are not applicable if an assessed is offering tax under presumptive taxation or professions making payments to a business as no specific expense is disallowed and income is deemed at a certain percentage.

Conclusion: The amendment to Section 43B of the Income Tax Act, 1961, with the insertion of clause (h), heralds a new era of financial discipline and accountability in dealings with MSMEs. It emphasizes the government’s commitment to fostering a robust MSME sector, crucial for the economy’s overall growth and development. Businesses must adapt to these changes by ensuring timely payments to MSME vendors, thus avoiding the pitfalls of disallowed deductions and contributing to a healthier, more sustainable economic ecosystem. As we navigate these changes, professional advice tailored to specific business circumstances becomes indispensable to navigate the complexities of compliance and optimize tax planning strategies effectively.

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Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement

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