Introduction: Delve into the transformative nuances brought about by Section 43B(h) of the Income Tax Act, effective from April 1, 2023. This section, coupled with the MSME Act, 2006, and Companies Act, 2013, significantly influences the treatment of expenses, especially for Micro and Small Enterprises (MSMEs). From disallowed expenses to mandatory compliances, this article breaks down the multifaceted implications for businesses.
Impact of Section 43B (H) of the Income tax Act, 1961 along with MSME Act, 2006, Companies Act, 2013, Books of Accounts & Tax Audit Report:
1. Section 43B (h) is applicable from 1st Apr’23 (New Clause by the Finance Act, 2023)
2. Expenses will be disallowed if payment is made beyond the limit specified u/s 15 of MSME Act, 2006.
3. Expenses can be claimed as deduction on payment basis and not on accrual basis
4. Not eligible to claim even we pay on or before furnishing of return of income u/s 139 (1).
5. This is applicable to only Micro and small and not medium enterprises.
6. It is applicable both for goods and sevices.
7. If there is agreement in writing between buyer and seller – On or before the date agreed and not beyond 45 days even if there is agreement in writing for more than 45 days from the date of accepatance or date of deemed acceptance.
8. If there is no agreement in writing then before the appointed day (i.e., within 15 days from the date of acceptance or date of deemed acceptance).
9. The date of accepatance or date of deemed acceptance means from the date of acceptance day of the goods or services.
10. Supplier must have registered under the MSME Act and must have filed the memorandum with the Authority i.e. Application on the Udhyam Portal.
11. Relevant sections are 2,7,8,9,15,16 & 23 of the MSME Act, 2006, Section 43B(h) of the Income Tax Act,1961 and Section 405 of the Companies Act, 2013.
12. If payment is not made within time limit then expenses will be disallowed as per Income Tax Act & 3 times of rate of interest to be paid.
13. As per our view we have to make accrual basis provision of interest at the time of finalization of books as on 31st Mar’24.
14. Interest calculated above to be paid along with the bill and this interest expense will be disallowed.
15. Presumptive Taxation – Payments due to small / micro enterprises availing presumptive taxation under Section 44AD are also covered under Section 43B(h).
16. The days should be on or before 45 days and can not go beyond 45 days even if there is agreement in writing and buyer is ready to accept the payment.
17. It considers the status of the supplier of goods and/or services and not considered whether the buyer is registered under the Act or not. The byuer of goods and/or services should comply the provision even if he has not registered under the MSME Act, 2006. The point to be noted here is that we have to see whether the seller is registered or not instead of buyer
18. It is applicable to all business concern except traders/retailer/distributer (As per office of memorandum dated 01.09.2021). The benefit is only to Priority Sector.
Eg: Proprietorship, a Hindu undivided family, an association of persons, a cooperative society, a partnership firm, a company or undertaking, or any other lawful entity.
19. It is applicable only to micro or small enterprises and not to Medium Enterprises. So we have to classify the buyer as registered or not and then micro or small or medium. So payment made to medium enterprises beyond the time limit will not be disallowed u/s 43B(h).
20. ROC MSME 1 form to be filed half yearly and due date is one month from the half year ended. The penalty is Rs 20000 for non compliance. This ROC form to be filed on or before 31st October for the period from April to September and by 30th April for the period from October to March.
21. If Investment is upto Rs 1 Cr and Turn over is Rs 5 Crore – Micro.
22. If Investment is upto Rs 10 Crores and Turn over is Rs 50 Crores – Small
23. If Investment is upto Rs 50 Crores and Turn over is Rs 250 Crores – Medium
24. The amendment to section 43B of the Act will allow the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
25. Tax Audit Report – Clause 22, Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006 – CA Should Report mandatorily.
26. Annual Report for Companies as per Companies Act, 2013 –
– the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year
– the amount of interest paid by the buyer in terms of section 16, along with the amounts of the payment made to the supplier beyond the appointed day during each year.
– the amount of interest due and payable for the period of delay in making payment but without adding the interest specified under this Act.
– the amount of interest accrued and remaining unpaid at the end of each year; and
– the amount of further interest remaining due and payable even in the succeeding years, until actually paid.
27. Practical Example :
(i) If expense incurred and paid within financial year – It is allowed irrespective of credit period.
(ii) If expense incurred during financial year and paid in next financial year within credit period allowed – Expense allowed in the year it was incurred.
(iii) If expense incurred during financial year and paid in next financial year beyond credit period allowed – Expense disallowed in the year in which it was incurred and allowed in the year of payment.
(iv) Interest on delayed payment – Disallowed and can not be claimed even after payment done.
28. Why Interest not allowed as an expense ?
– It is in the nature of penalty or it is penal interest and it is not allowed as an expenditure under Income Tax Act 1961 and due to the overriding effect of section 23 of MSMED Act 2006.
29. Day of Acceptance or deemed acceptance of Goods –
(a) Where no objection raised by the buyer – actual delivery of goods or the rendering of services
(b) Where objection raised by the buyer within 15 days – the day on which such objection is removed by the supplier.
30. Provision of section 43B(h) not applicable on outstanding balance as on 31st Mar’23.
31. What are the steps to be taken by the business concern (Assessee) :
(i) Take out list of outstanding creditors as on 31st Mar’24
(ii) Legal Status of the outstanding creditors as on 31st Mar’24
(iii) Classify the nature of supplier viz., Manufacturer, service providers and Traders/retailers/distributor
(iv) Obtaining latest MSME certificates
(v) Declarations on enterprise classification – Micro, Small and Medium and Turnover of the preceding year
(vi) Written agreement between seller and buyer or service provider and service receiver
(vii) Ageing as below 15 days, more than 15 days but below 45 days and more than 45 days
(viii) We can remove the following suppliers from the total list of creditors as on 31st Mar’24 (i.e., from point i)
– Supplier who supply from outside India
– Traders, Retailers & Distributors
– Medium Enterprises (If Investment is upto Rs 50 Crores and Turn over is Rs 250 Crores)
– Not Registered under the MSME Act, 2006.
32. The day of the actual delivery of goods or the rendering of services should be taken if invoice date and delivery date are different.
Conclusion: In the evolving landscape of tax and MSME regulations, Section 43B(h) emerges as a pivotal player, influencing how businesses account for expenses. Coupled with the MSME Act and Companies Act, its impact spans tax audits, compliance reports, and day-to-day operations. This comprehensive guide equips businesses with the knowledge needed to navigate these intricate regulations, ensuring adherence and avoiding potential consequences.