Understanding Section 43B: MSME Payment Deductions

“Delve into the intricacies of Section 43B of the Income Tax Act, a crucial provision impacting deductions in MSME payments. Explore the proposed amendment in the Union Budget 2023 and its implications. Understand the critical points, definitions, and payment timelines outlined in the MSMED Act, 2006. Stay informed to optimize deductions, ensure compliance, and navigate the evolving landscape of income tax calculations. Learn how businesses can align financial planning and tax strategies with the latest legislative changes for maximum benefit.”

Introduction: Section 43B of the Income Tax Act is a crucial provision that governs the deduction of certain sums when computing income. It is particularly relevant in cases where payments are made to Micro and Small Enterprises (MSMEs). This article provides an overview of Section 43B, highlights the proposed amendment in the Union Budget 2023, and discusses the critical points to consider regarding MSME payments.

Gist of Section 43B

Sec 43B prescribes certain sums which are to be allowed as Deduction in computing Income referred in Sec 28 in the cases of actual payment of such sums only. Mere liability to pay such sums according to the method of accounting employed by him do not qualify for the deduction.

However, exception is given to those assessee who are following mercantile method of accounting and payment has been made within the due date of filing of return u/s 139(1). Thus, he can claim the sum as deduction in the year of an accrual.

Following New Clause “h” is proposed to be inserted in Sec 43B vide Union Budget 2023 and applicable from FY 2023-24.

“Any sum payable by the assessee to a Micro or Small Enterprise beyond the time limit specified in Section 15 of Micro, Small and Medium Enterprise Development act, 2006.”

Important Points to be considered:

Medium Enterprises are not covered in this clause.

• Definition of Micro Enterprise

Micro Enterprises are the enterprises having

1. Turnover <= 5 Crores and

2. Investment in Plant and Machinery <= 1 Crore.

(Both the conditions have to be satisfied)

• Definition of Small Enterprise

Small Enterprises are the enterprises having

1. Turnover <= 50 Crores and

2. Investment in Plant and Machinery <= 10 Crore.

(Both the conditions have to be satisfied)

• Time Limit for the payment as per Sec 15 of MSMED act, 2006

Buyer shall make the payment for the supply of Goods or rendering of services within

1. the date agreed upon by him and supplier, in case of a written agreement

However, in no case the period agreed upon between buyer and supplier shall exceed 45 days from the day of acceptance or deemed acceptance.

(Or)

2. the appointed day, in absence of any agreement.

The appointed day means the day following immediately after the expiry of 15 days from the day of acceptance or deemed acceptance.

• Day of Acceptance means

1. The day of actual delivery of Goods or rendering of services, (or)

2. If objection is raised regarding acceptance of goods or service by the buyer in writing within 15 days of delivery of goods or rendering of services, then the day on which such objection is resolved by the supplier.

• Deemed acceptance means the day of actual delivery of Goods or rendering of services, where NO objection is raised by the buyer regarding the acceptance of Goods or Services within 15 days of delivery of goods or rendering of service.

Applicability of the proviso of making the payment within the due date of filing the return u/s 139(1) is also not applicable.

Therefore, if payment is made within the due date of filing return u/s 139(1) but beyond the due date mentioned in MSMED act, 2006, then deduction shall be available in the year of Payment and not in the year of Accrual.

Ex 1: Mr A (Supplier) delivers goods of Rs. 35000 to Mr B (Buyer) on 20/03/2024 with the following dates of payment specified in written Agreement in different scenarios.

Ex 2: Mr A (Supplier) delivers goods of Rs. 35000 to Mr B (Buyer) on 15/03/2024 in absence of any agreement with regards to the time limit of Payment.

• Now Mr B has a time limit of 15 days i.e., within 30/03/2024 for raising any objection in case of having non satisfaction with regards to a goods delivered.

Scenario A – Mr B is satisfied with the delivery of goods and does not make any observation.

• In this scenario Date of acceptance is the date of first delivery of goods i.e., 15/03/2024.
• Due date for making the payment as per Sec 15 of MSMED act, 2006 is the appointed day which is the day after the expiry of 15 days from the date of acceptance i.e., 31/03/2024.
• Therefore, if Mr B makes the payment within 31/03/2024, he can claim the deduction in the FY 2023-24 otherwise in the FY in which he makes the payment.

Scenario B – Mr B makes objection regarding the quality of Goods delivered to the Mr A on 31/3/2024. And Mr A resupplies goods after addressing the objection on 5/4/2024.

• In this scenario Date of Deemed acceptance is the date of first delivery of goods i.e., 15/03/2024, as no objection is raised within 15 days from date of delivery.
• Due date for making the payment as per Sec 15 of MSMED act, 2006 is the appointed day which is the day after the expiry of 15 days from the date of acceptance i.e., 31/03/2024.
• Therefore, if Mr B makes the payment within 31/03/2024, he can claim the deduction in the FY 2023-24 otherwise in the FY in which he makes the payment.

Scenario C – Mr B makes objection regarding the quality of Goods delivered to the Mr A on 26/3/2024. And Mr A resupplies goods after addressing the problem on 5/4/2024.

• In this scenario, Date of acceptance is the date on which objection is resolved i.e., 05/04/2024.
• Due date for making the payment as per Sec 15 of MSMED act, 2006 is the appointed day which is the day after the expiry of 15 days from the date of acceptance i.e., 21/04/2024.
• Therefore, if Mr B makes the payment within 21/04/2024, he can claim the deduction in the FY 2023-24 otherwise in the FY in which he makes the payment.

Conclusion:

Section 43B plays a pivotal role in income tax calculations, especially concerning payments to Micro and Small Enterprises. The proposed addition of Clause “h” in Section 43B, effective from FY 2023-24, highlights the importance of timely payments to these entities. Businesses must be aware of the definitions of Micro and Small Enterprises, as well as the intricacies of payment timelines outlined in the MSMED Act, 2006.

In summary, understanding Section 43B and its implications for MSME payments is vital for ensuring compliance and optimizing deductions while staying up-to-date with the latest legislative changes introduced in the Union Budget 2023. This knowledge can significantly impact a business’s financial planning and tax strategies.