Section 43B(h): New Tax Rules for Payments to Micro & Small Businesses

Introduction: In a proactive measure to support Micro and Small Enterprises (MSEs), the recent Finance Act has modified Section 43B of the Income Tax Act, introducing crucial provisions under clause (h). This amendment specifically addresses the tax implications associated with delayed payments to micro and small suppliers, applicable from the Assessment Year 2024-2025.

In this write up we discuss about the tax implications on delayed payments to micro and small suppliers which are applicable from A.Y 2024-2025.

Previously, businesses could claim deductions for payments made to MSEs in the year the liability arose, even if the payment was delayed. However, the new provision under clause (h) shifts the deduction timing for late payments to the year in which they are actually made.

As per Section 15 of the MSMED Act, 2006, payment timelines for buyers are:

As per section 43B(h) of Income tax act which is applicable from A.Y 2024-2025.

Any amount paid to a micro or small enterprise beyond the specified date shall be allowed only in previous year in which such sum is actually paid.

Please note that the deduction is not allowed even if the payment is made on or before the due date of ITR in respect of the previous year in which the liability to pay such sum was incurred.

To comply with the new income tax regulations regarding payments to Micro, Small, and Medium Enterprises (MSEs), here are the action items you should undertake:

1. Create and Maintain a Vendor Tracker: Classify all your vendors into three categories: Micro, Small, and Medium. This will help understanding tax implications for each category.

2. Identify Overdue Payments to MSEs: Review your accounts payable and identify any payments to MSEs as on 31-March that are overdue according to the MSMED Act.

3. Disallow Overdue Payments in Tax Computations for A.Y 2024-2025: While calculating your tax payable for the A.Y 2024-2025, disallow overdue payables to MSEs.

4. Monitor and Record Subsequent Payments: Keep track of all payments made to MSEs subsequently and ensure that these payments are claimed as deductions in the year in which the payments are actually made.

Illustration 1:

• Due Date (MSME Act): May 31, 2023
• Actual Payment Date: March 31, 2024
• Expense Claim: Allowed in FY 23-24. Even though payment was made on the last day of FY 23-24, it’s still allowed as a deduction in that year because it falls within the same financial year as the due date.

Illustration 2:

• Due Date (MSME Act): May 31, 2023
• Actual Payment Date: April 1, 2024
• Expense Claim: Not allowed in FY 23-24; allowed in FY 24-25. Payment made a day after the financial year in which the due date falls cannot be claimed as a deduction in that year. It must be claimed in the year it was actually made.

Illustration 3:

• Date of Accounting: March 31, 2024
• Due Date (MSME Act): April 15, 2024
• Actual Payment Date: April 20, 24
• Expense Claim: Allowed in FY 23-24. Even though payment was made in subsequent year, it is still allowed in FY 23-24 because it wasn’t overdue as per the MSMED Act at the time of accounting. The due date fell in the next financial year.

Conclusion: Understanding and adhering to regulatory developments, such as the amendments in Section 43B(h), is imperative. By following the outlined action items, businesses can navigate the new income tax regulations effectively, safeguarding their interests and ensuring compliance.