Simplified Understanding of Section 43B (h): Expenditures Allowed on Payment basis for Micro & Small Enterprises

Simplified Understanding of Section 43B (h): Expenditures Allowed on Payment basis for Micro & Small Enterprises

Introduction

The Finance Act of 2023 introduced a crucial amendment stating that if payments to Micro or Small enterprises are delayed beyond the specified credit period, they will now be allowed only on a payment basis.

This article explains an important requirement that affects every business person in the simplest way possible. It covers the following aspects:

Insertion to Section 43B

Clause (h) shall be inserted after clause (g) of section 43B by the Finance Act, 2023:

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), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

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.

What’s MSME

• Applicable w.e.f. 1st July 2020
• Composite Criteria: Investment in Plant & Machinery/equipment and Annual Turnover
• Criteria for Classification of Enterprises

Classification	Investment in Plant & Machinery	Turnover	Section 43B (h)
Micro	Upto 1 Cr	Upto 5 Cr	Yes
Small	Upto 10 Cr	Upto 50 Cr	Yes
Medium	Upto 50 Cr	Upto 250 Cr	No

Explanation:

From 1st April, 2024 (AY 2024-25) As per Section 43B Clause (h) of the Income Tax Act and 15, 16, and 2(b) of the MSME Act, Expenditure related to Purchases / Services taken from Micro and Small Enterprises will only be allowed if the payment is made within the time limits as per MSME Act.

As per Section 15 of the MSME Act, Liability of buyer to make payment:

Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing, or where there is no agreement in this behalf, before the appointed day:

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

Further as per Section 2(b) of the MSME Act “appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

Explanation—For the purposes of this clause—

(i) “the day of acceptance” means

(a) the day of the actual delivery of goods or the rendering of services; or

(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;

(ii) “the day of deemed acceptance” means

where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;

Simplifying the concept of the Allowability of Expenditures

Expenses Incurred in	Payment Made in	Credit Period*	Allowable in	Basis
Current FY	Current FY	Not relevant	Current FY	NA
Current FY	Next FY	Within Limit	Current FY	Accrual Basis
Current FY	Next FY	Beyond Limit	Next FY	Payment Basis

*Credit Period to consider for Accrual basis allowance: Agreed Payment days or 45 days whichever is earlier

 Applicability of Section 43B(h):

applies to all assesses having business Income (regardless of audit status, tax audit, or turnover) for payments made to Micro or Small enterprises.

Illustrative Scenarios for better understanding

Scenario	Date of acceptance	Payment Date	Payment Duration (in Days)	Expenses Allowable in		Allowance Basis
				FY 2023-24	FY 2024-25
1	30-12-2023	28-03-2024	90	Yes	–	Payment basis
2	30-12-2023	10-01-2024	12	Yes	–	Accrual Basis
3	30-12-2023	10-04-2024	103	–	Yes	Payment basis
4	15-03-2024	25-04-2024	42	Yes	–	Accrual Basis
5	30-12-2023	10-03-2024 (50%)	77	Yes	–	Payment basis
		17-05-2024 (50%)	108	–	Yes	Payment basis
6	30-12-2022	15-04-2024	472	–	–	Claimed in FY 22-23
7	30-03-2024	Unpaid till ITR filing date	–	–	Yes*	Payment basis
8	15-03-2024	15-04-2024 (Cheque Issued) 15-05-2024 (Cheque cleared)	30 60	–	Yes	Payment basis (As credit period lapsed)

*If payment made afterwards in FY 2024-25

Recommendation to Business Assesses

Businesses are recommended to monitor their pending payment obligations for the supplies / services availed from the Micro and Small enterprises and ensure that these payments are settled within the mutually agreed credit period, with a maximum limit of 45 days to avoid the consequences.

Role of a Tax Auditor

Tax auditors play a pivotal role in ensuring the compliance with Section 43B(h) and reporting their findings in the Tax Audit Report. It is imperative for the tax auditors to ensure the outstanding payments as of March 31, 2024 do not exceed 45 days. Auditors may need to communicate with vendors, especially Small and Micro enterprises, to assess the status of outstanding balances and verify compliance.

Conclusion

The amendment brought in by incorporation of Clause (h) to Section 43B of the Income Tax Act effectively addresses the challenge of delayed payments faced by the micro and small enterprises, emphasizing that deductions can only be claimed by buyers when payments adhere to specified timeframes. It aligns well with the government’s commitment to enhancing the growth of the small businesses in India and recognizing their pivotal role in the Indian economy, this regulatory change underscores a supportive environment. As businesses and tax professionals adapt to these changes, it becomes crucial to stay informed and adhere to the updated regulations. This is essential to maintain smooth operations and ensure effective financial governance.