Much debate is going on the newly introduced clause (h) of the section 43B  of the Income Tax Act 1961, which comes into effect from the Assessment Year 2023-24 onwards on the allowability of the expenses either for buying goods or taking services on and from 01.04.2023 from the Micro and Small Enterprises as defined in the MSME Act 2006,which is 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 or engaged in providing or rendering any service or services. For claiming deduction, the payment should be made within 15 days or if there is a written agreement between the buyer and seller within 45 days and not beyond that (even if they have an agreement) from the day of supply of goods or services or acceptance of the same whichever is later, as specified in the section 15 of the MSMED Act 2006. The small enterprise must have an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores and the medium enterprise should have an investment in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores. Further an enterprise which is engaged in trading is not covered by the term “enterprise” and hence it cannot also avail the benefit.

To claim the deduction the payment should have been made within 15 or 45 days as the case may be; but as per the section the deduction will be allowed even if paid beyond the specified days if they are paid within the year or in the year of payment provided they are paid with compounded interest with monthly rests three times of the of the Bank as specified by RBI. Since the present RBLR being 6.5% the rate of interest works out to be a whopping 19.5%, which seems to be quite unreasonable. The final straw is that this interest will not be an allowable expenditure since it is penal in nature. Whether they can forego the interest is another question to be answered.

As far as the ‘Purchasers’ are concerned it sems that it is applicable to all assessees irrespective of their business activity as it is not restricted to manufacturers or industries only. It is applicable to professionals also who purchase goods or get supply from MSMEs.

Though the intention of the Government is justifiable in safeguarding the interests of the MSMEs, this provision should not affect genuine business transactions. The value of any product or service is determined by the quality or nature of the goods or services and in addition it depends on the demand and supply of the same. As seen from the current business news many big business houses are starting to return or reject the goods to avoid further complications which will be affecting the MSMEs to a very great extent, which is a ‘Bane’ for MSMEs.

Whether Section 43B(h) is Boon or Bane for MSMEs

Further reporting about the same in audit reports after ascertaining whether the enterprise is eligible for the benefits and then disallowing the same in one year and allowing the same in another year in addition to finding out whether interest is correctly calculated and paid in addition to disallowing the interest portion will increase the workload of the auditors to a very great extent. For assesses who are not subject to audit they themselves have to disallow the expenditure as specified in the Act.

A firm of Chartered Accountants, who has got Udyam Registration, can avail the benefits of section 43B(h) and the clients including Banks and Government enterprises can not keep the bill pending for more than15 days, which is ‘Boon’ for the firm of Chartered Accountants; this benefit may not be available for members practicing individually because they may not be able to get Udyam Registration.

After getting inputs from all stake holders viz. MSMEs., Big Business houses, Manufacturers, Chartered Accountants, Advocates and Tax Practitioners the Government has to re-visit the issue to avoid further complications and litigations.

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February 2024