Introduction: The Government of India’s commitment to bolstering the liquidity and operational viability of Micro, Small, and Medium Enterprises (MSMEs) is evident in its recent legislative amendments, particularly within the Income Tax Act, 1961. The amendment to Section 43B, introduced through the Finance Bill of 2023, marks a significant shift in the treatment of payments to MSMEs, underscoring the government’s intent to ensure timely financial transactions to this crucial sector. This article aims to dissect Section 43B(h) of the Income Tax Act, 1961, elucidating its impact on businesses engaged with Micro and Small Enterprises (MSEs), the applicability of the clause, and the operational guidelines for maintaining compliance. By analyzing the background, scope, and implications of this amendment, we seek to provide a comprehensive understanding of the measures businesses must adopt to align with the government’s enhanced support framework for MSMEs.

Enhancing MSME Liquidity through Payment-Based Deductions: Insights into Section 43B Amendments

Overview of MSME Support Measures: The government’s initiative to boost liquidity for Micro, Small, and Medium Enterprises (MSMEs) has led to significant policy reforms. The amendment of the CCompanies Act in 2013 required firms to disclose their dues to MSMEs annually and introduced penalties for late payments. The Finance Bill of 2023 further emphasized support for MSMEs by revising Section 43B of the Income Tax Act to include payments made to MSMEs.

Scope of the Amendment: This amendment targets all transactions with entities registered under the MSMED Act of 2006, with a focus on Micro and Small Enterprises, thus excluding Medium Enterprises from its ambit.

Details of Section 43B(h): According to Section 43B(h), any dues to Micro & Small Enterprises that are not settled within the deadline set by Section 15 of the MSMED Act can only be deducted in the fiscal year in which these payments are actually made. This rule applies regardless of the fiscal year in which the obligation was recognized, based on the taxpayer’s usual accounting practices.

Section 43B(h) Enhancing MSME Liquidity through Payment-Based Deductions

Relevance of Clause (h) in Section 43B: This specific clause is relevant to transactions involving goods or services from entities registered under the MSMED Act of 2006. It is crucial to note that the purchaser need not be registered under the MSMED Act for this clause to apply. This provision became effective on April 1, 2023.

Definition of Micro & Small Enterprises: Micro Enterprises are those with investments in plant and machinery up to 1 Crore and a turnover of up to 5 Crores. Small Enterprises are defined by an investment limit in plant and machinery of up to 10 Crores and a turnover of up to 50 Crores.

Payment Deadlines: The law mandates payment to Micro & Small suppliers within 45 days, subject to the terms of any written contract. Without a contract, payments must be made within 15 days. Any agreement must ensure payments are made within 45 days.

Tax Implications: Delayed payments to Micro & Small Enterprises result in the owed sum being considered taxable income for the payer in the year the payment was due. Deductions are permissible only in the year the payment is actually made.

Ensuring Compliance:

To maintain compliance, businesses should segregate their suppliers based on their MSME status and adhere to the specified payment schedules. Awareness of the MSME registration and compliance with both the Income Tax Act and Companies Act are vital for avoiding disallowances.

Final Thoughts:

Grasping the implications of Section 43B’s amendment is crucial for entities dealing with MSMEs. Compliance with payment schedules and the proper classification of suppliers are key to preventing disallowances and facilitating compliance. With the government’s sustained support for MSMEs, companies must remain alert and ready to adjust to these legal adjustments.

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March 2024