Introduction: Section 43B of the Income-tax Act, 1961, has been amended with the introduction of section 43B(h) to promote timely payments to Micro and Small Enterprises (MSMEs). This amendment impacts the deduction of payments to MSMEs beyond statutory timelines.
Section 43B(h) – payments to MSMEs beyond statutory timeline to be allowed only on actual payment basis
a. Section 43B of the Income-tax Act, 1961 (‘the Act’) provides for certain deductions to be allowed only on actual payment basis
b. In order to promote timely payments to MSMEs, the Finance Act, 2023 introduced section 43B(h) to the Act to permit deduction for payments made to MSMEs
i. On accrual basis only if the payment is made within the statutory timeline mandated by the MSMED Act
ii. in case of any defaults where payments are made to MSMEs beyond the statutory timeline as per MSMED Act, deduction under the Act will be allowed only on actual payment basis in the year in which the payment is made.
c. First proviso to section 43B which permits deduction in the year of accrual if payment is made within the due date of filing of return of income is not applicable
d. Thus, in case of delay, the year of deduction shifts to year of payment
e. Provision applies from AY 2024-25 (.i.e., FY 2023-24)
Key Considerations w.r.t the applicability of the amendment:
a) Only Micro and Small enterprises are under the purview of the provision. It is not applicable for Medium enterprises registered under MSMED Act.
b) Any outstanding balance as on 31st March 2023 if continues to remain outstanding as on 31.03.2024 the provisions meant for disallowance contained in section 43B(h) would not apply and shall not attract any disallowances.
c) As per definition of Micro and Small enterprises provided under MSMED Act, entities engaged in manufacturing and production of specified goods and engaged in providing or rendering any services are covered. A position can be taken that small and micro enterprises engaged in trading activities shall not attract disallowances as per section 43B.
d) Deduction shall be available year of payment. However, if payment is made within same Financial Year, even delayed shall not attract disallowance. Interest on delayed payments shall be continue to be disallowed (Permanent Difference).
e) Date of acceptance i.e., GRN/SES shall be considered for determination of due date of payment instead of invoice date.
f) Due date as per Sec 15 of MSMED Act, 2006 shall be:
-
- Credit period of 45 days, or
- Agreed credit period as per Purchase Order,
Whichever is earlier.
(Due Date is to be calculated from the date of removal of objection, if any, by the Supplier where buyer has raised objections within 15 days)
Examples:
| S.No. | Due date as per MSMED Act | Date of Payment | Year of deduction | Remarks |
| 1. | 9 June 2023 | 20 June 2023 | FY 2023-24 | Allowable in the year of payment .i.e., FY 2024-25 |
| 2. | 15 March 2024 | 15 March 2025 | FY 2024-25 | Allowable in the year of payment .i.e., FY 2024-25 |
| 3. | 10 June 2023 | 31 March 2024 | FY 2023-24 |
|
| 4. | 15 March 2024 | 1 April 2024 | FY 2024-25 |
|
| 5. | 15 March 2023 | 15 April 2024 | FY 2022-23 |
|
| 6. | 19 March 2023 | 25 February 2024 | FY 2023-24 | Deduction is allowed in the FY 2023-24 as it was paid in the same FY. |
| 7. | 10 April 2024 | 5 April 2024 | FY 2023-24 | Deduction is allowed in the FY 2023-24 as the payment is made before the due date as per MSMED Act. |
| 8. | 10 April 2024 | 12 April 2024 | FY 2024-25 | Deduction is disallowed in the FY 2023-24 as the payment is not made within the due date as per MSMED Act. |
Conclusion: The amendment under Section 43B(h) shifts the deduction of payments to MSMEs to the year of actual payment if made beyond statutory timelines. Key considerations include the definition of MSMEs, due dates, and examples illustrating the application of the provision. Understanding these changes is crucial for taxpayers to comply with tax regulations effectively.
Author Bio
sir,
A Doctor maintained a private hospital tax audit itr filed every year purchase of hospital material and hospital equipment and others transaction credit based from different trader’s.outstaning ledger balance rs 50 lacs as on dt:31-03-24 for creditors
question:
repayment clause 15/45 days and sec 43 b (h) both provisions applicable for hospital