The Finance Act, 2023, has inserted section 43B(h) to facilitate timely payments to MSMEs by withholding deduction on account of delayed payments beyond prescribed timelines under the MSMED Act. This amendment is to come into effect from AY 2024-25 and will actually strengthen financial discipline as it allows an expense only in the year when the payment is made if the payment exceeds the prescribed timelines under the MSMED Act. The necessity of this amendment is that MSMEs need to improve cash flow stability for the smooth running of their ventures so as to boost Indian economy.
1. Clause (h) of Section 43B:
Clause (h) came into existence by the Finance Act, 2023. It came into force from the Assessment Year of 2024-25. The fundamental idea of this clause is that the payment to MSMEs has to be made in time. Expenditure claimed by such enterprises would be disallowed if payment to the businesses is not made within the time limits prescribed under the Micro, Small, and Medium Enterprises Development (MSMED) Act. Such expenses can be only claimed in the year of actual payment.
- Explanation: All business enterprises have been made to make payments their MSME suppliers strictly in accordance with the payment schedule. Payments made beyond the due date attract disallowance of the expenditure during the concerned financial year. This provision is considered one which disciplines the finances since expenses given to MSMEs are allowed to be deducted only in the year when such actual payment is made. This provision was meant to strengthen the financial/money position and liquidity for small enterprises which supports the economic ecosystem.
2. Section 15 of the MSME Act: Specify the payment terms between buyers and suppliers. As per Section 15 the payment terms should be as per the mutually agreed terms between the two parties. If no agreement is made the default time limit for payment is set at 15 days from the date of supply.
- Explanation: The MSMED Act clearly states the payment period. In the case of an agreement, it cannot exceed more than 45 days from the date of supply of goods or services. Section 43B(h) enforces this payment discipline by rejecting the claim of expediency of certain expenses if the payment is done after the agreed period or the default period of 15 days. This provision is administered with the objective of ensuring that the payments to the micro and small enterprises are timely. This is significantly helpful in improving cash flows, as well as efficiency in operations.
3. Classification of Enterprises:
Classifying micro and small enterprises, the MSMED Act considers investment and turnover. The details are given below:
Micro Enterprises: Plant and machinery’s value up to Rs. One Crore and turnover up to Rs. 5 crore
Small Businesses: Rs. Ten crore Investment in plant and machinery and the turnover not exceeding Rs. Fifty crore.
- Explanation: Section 43B(h) applies only to these micro and small enterprises as defined by the MSMED Act. Medium enterprises and larger entities are not covered under this section, which limits its applicability to the smallest and most vulnerable businesses in the economy.
4. Apply to Outstanding Amounts prior to the FY 2023-24:
Clause (h) of Section 43B brings this amendment. This is prospective in nature, which means it only applies to transactions after April 1, 2023. All payments that were outstanding before the beginning of FY 2023-24 and its relevant sections will not be affected by Clause (h) of Section 43B.
- Explanation: Since the amendment applies prospectively, any amounts due to MSMEs as of April 1, 2023 do not fall under the purview of Section 43B(h). The same approach would also clarify the date when this section would come into force and prevent later complexity over its retrospective applicability. Business needs, hence should pay through only those transactions initiated in FY 2023-24 for the purposes of compliance with Section 43B(h).
5. Applicability to Traders:
Section 43B(h) cannot be applied to the payments made to the traders because they do not fall in the definition given under the MSMED Act by terms of Micro or Small Enterprises. MSMED Act essentially divides into entities involving manufacturing or service provision and traders are excluded from this definition.
- Explanation: Industrial or service establishment undertaking: MSMED Act expressly provides for any industrial or business undertaking either for manufacturing or rendering services. As a consequence, traders, wholesalers, or retailers do not come in its purview, and hence Section 43B(h) bars them. This restriction helps in promoting timely payments specifically to entities involved in production or services, which are often more vulnerable to cash flow issues caused by delayed payments. By excluding traders, the section remains targeted towards the intended beneficiaries manufacturers and service providers.
6. Effects on the Presumptive Taxation Scheme:
Section 43B(h) is excluded for taxpayers opting for presumptive taxation under Sections 44AD, 44ADA, or 44AE. These sections deal with simplified income tax calculations for small businesses and professionals. Section 44AD applies to a small business with a turnover not exceeding Rs. 2 crore. Section 44ADA applies to professionals like doctors lawyers etc. whose gross receipts do not exceed Rs.50 lakh. Section 44AE applies to transporters who have up to 10 vehicles.
- Reason: The provisions of these sections begin with non obstante clauses therefore, these sections override all provisions in conflict, amongst which is Section 43B. This means that these schemes are adopted by the taxpayers, and they declare their income as a percentage of turnover hence not affected by disallowances under Section 43B(h) which operates on actual payment based criteria.
7. Capital Goods Expenditure:
Section 43B(h) deals with only the revenue expenditures. Payments relating to capital goods such as machinery or equipment purchase fall outside the ambit of this section.
- Explanation: Capital goods are accounted for differently as they yield their benefits over periods and are capitalized in the balance sheet rather than being completely expensed in the profit and loss account. As section 43B(h) relates to disallowances in the P&L account, so it does not impact the payments that are classified as capital expenses, aligning it with standard accounting principles.
8. Due Dates Under Various Situations:
Payments to MSMEs should be made within the prescribed timelines for which such payments are to be allowed to be deducted under Section 43B(h). The MSMED Act governs the time frame which is either as provided by agreements or in default.
Explanation: The MSMED Act determines two situations that determine the payment period.
i. With a Written Agreement: The payment period should be in terms agreed between the parties which cannot be more than 45 days from the date of supply .
ii. Without a Written Agreement: In such cases of no written agreement payments have to be made well within 15 days of supply. If done otherwise, there is disallowance under Section 43B(h).
Key Clarifications:
i. Meaning and Objective of Section 43B(h): It provides for exclusion from allowance as deduction any amount paid to MSMEs after due date as prescribed under MSMED Act thus making payments promptly.
ii. Date of Commencement: This provision will come into effect from AY 2024-25 applying to all transactions beginning FY 2023-24.
iii. Meaning of Enterprise: The term “enterprise” would include only manufacturing or service enterprises based on MSMED Act definitions. However, it would not include traders, wholesalers, and retailers.
iv. Payment Period: A written agreement can have an extended payment period up to 45 days. However, if no agreement exists, the default payment period is 15 days. Deviation in this case disallows expense under the current financial year.
v. Applicable to All Buyers: This section under Section 43B(h) shall govern every buyer who takes goods or services from MSME units. This broad applicability helps enforce accountability for all types of businesses.
vi. Supplier Registration Requirement: This is applicable only to those registered MSMEs under the MSMED Act. Therefore, transactions with unregistered suppliers are excluded
vii. Impact on opening Balance: Provisions of Section 43B(h) do not affect balances carried on to 1st April, 2023.The section applies only to current payments after its enforcement.
viii. Partial Payments: If any part payment is received within the specific time that particular part payment is allowed as a deduction for that amount, but any remaining part of the amount, which remained unpaid and passed the due date is disallowed.
ix. GST component Disallowance: Disallowance U/S. 43B(h) is limited to expenditure debited to the profit and loss account. GST components recorded as receivable are not subject to disallowance under this section.
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