Introduction: India’s Micro, Small, and Medium Enterprises (MSMEs) are pivotal to the economy, contributing about 30% to the Gross Value Added (GVA) in GDP and 36% to all India Manufacturing output. To safeguard MSMEs, the government has implemented various policies, including tax disallowances for interest on delayed payments. The recent amendment to Section 43B in the Income Tax Act introduces a new clause (h), aiming to discourage delayed payments to MSME suppliers.
India’s micro, small, and medium enterprises (MSMEs) enjoy significant government policy support, like sector-based production-linked incentives (PLI) programs, incentives targeting specific regions, or schemes for businesses linked to technical skilling and digital tools, applications, and technologies, among others. The share of MSME Gross Value Added (GVA) in all India Gross Domestic Product (GDP) is about 30% and MSME manufacturing output in all India Manufacturing output is around 36%. The Government has been taking various steps to protect the interest of Micro and Small enterprises under the MSMED act. One of such initiative is tax disallowances of interest on delayed payment or amount of delayed payment to MSME supplier.
Tax Disallowances
In order to encourage entrepreneurs to release the payments in time or to avoid delayed payment, Section 23 MSME Development Act (MSMED) 2006 provides for income tax disallowance for interest paid for delayed payment. Clause 10 of the Tax Audit report mandate to report the amount of interest inadmissible u/s 23 of the MSMED, Act 2006
In line with this, the Finance Act 2023 has introduced one more measure by amending section 43B of the Income tax act, 1961 to disallow amount of overdue creditors registered as Micro or Small Enterprises under MSME Development Act (MSMED) 2006. The new Clause (h) to Section 43B has been inserted which is applicable from assessment year 2024-25 and onwards is as under.
“any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006)”
Provided that nothing contained in this section [except the provisions of clause(h)] shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.”
Time Limit for Payment
As per Section 15 of MSMED Act the buyer should make payment to any supplier as per the terms decided or 45 days from the date of actual delivery of goods or rendering of services, as the case may be whichever is earlier. In case where there is no agreement with buyer, due date is 15 days from the date of actual delivery of goods or rendering of services as the case may be.
Micro and Small Enterprise
Section 43B(h) is applicable only to Micro and Small enterprise hence disallowance u/s 43B of the Act will not be attracted if the supplier is Medium Enterprise. In order to classify Micro or small Enterprises, the MSMED Act, 2006 has prescribed the criteria as under:
| Type | Investment threshod (Plant and Machinery) | Turnover threshold |
| Micro Enterprise | Less than INR 1 Crore | Less than INR 5 Crore |
| Small Enterprise | Less than INR 10 Crore | Less than INR 50 Crore |
| Medium Enterprise | Less than INR 50 Crore | Less than INR 250 Crore |
Year-end outstanding
If creditors are outstanding as on March 31 for a period exceeding 45 days or 15 days, as the case may be, the concerned expenses will be disallowed for the relevant year and it will be allowed in the year in which the said payment is made.
Generally, in case of section 43B disallowances, expenses are allowed as deduction if it is paid on or before due date of filing return of income as prescribed under section 139. It is not the case with section 43B(h) disallowances, where in it will be allowed as expenses in the year in which the same is paid. For example, overdue Creditors as on 31/03/2024 is paid as on May 15, 2024 <Before due date of filing return> it will be allowed as deduction in FY 2024-25 and not in FY 2023-24.
Applicability to Trader/Distributors
On literal reading of the definition of enterprises, only persons dealing in either Manufacturing of Goods or providing any services will be classified as an Enterprise. One could surely take a stand that trader / Retailer/ Distributor, etc would not be classified as an Enterprise and would not be covered under the Micro or Small Enterprise definition.
“enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;”
Double Edged Sword
The amendment to section 43B intent to encourage the entrepreneurs to release the payment in time which will assist Micro and small entities to have less working capital by timely availability of funds.
Other side of coin is that, it casts huge compliance burden and additional responsibility on enterprises, failing to which may lead to substantial amount of tax outflows. Deployment of additional resources to monitor the accounts payables may lead to increase the operating cost. Classification of each creditor at every year is tedious task as every year the status may vary as its linked with turnover and investment of enterprise. In addition to this authenticity of information provided by the entrepreneur is again a big challenge for both tax auditors and assesses. In effect, instead of suffering disallowance of legitimate expenses, Medium or Large entities may switched to captive supply model or stop dealing with micro and small entities.
Key Takeaways
- At the year-end each enterprise (irrespective of audit applicability) should assess the status of their outstanding creditors to characterised as the Micro and small enterprise.
- It is highly recommended to obtain MSME certificate along with declaration on the classification of an enterprise from a supplier.
- Tax auditors to scrutinise the information and documents maintained by the tax payer and authenticity of documents to figure out disallowance under section 43B.
Conclusion: The amendment to Section 43B is a strategic move to prompt timely payments to MSMEs, promoting their financial health. However, it places a compliance burden on enterprises, necessitating meticulous classification and documentation of creditors. The impact could lead to increased operating costs and potential shifts in business models.
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