Explore the implications of Section 43B(h) of the Income Tax Act, a crucial amendment aiming to ensure timely payments to Micro & Small Enterprises (MSMEs). Effective from April 1, 2023, this section imposes disallowances for delayed payments, impacting the taxable income of the assessee.
This clause is applicable on all types of Purchases made from the enterprise which has been registered under MSMED Act,2006. This clause is applicable on Micro & Small Enterprises. Medium Scale Enterprises are outside the ambit of this clause.
Section 43B(h) states that any sum payable by the assessee to a micro & small enterprises beyond the time limit specified in Section 15 of Micro ,Small and Medium Enterprises Development Act 2006 shall be allowed only in computing the income referred in Section 28 of that previous year in which sum has been actually paid (irrespective of the previous year in which liability to pay sum was incurred by assessee according to the method of accounting regularly employed)
This clause is applicable when an enterprise is buying goods or taking services from an enterprise which has been registered under MSMED Act 2006
Note: Registration of buyer under MSMED Act,2006 is not mandatory. Clause h of Sec 43B(h) is applicable from 01 April 2023
Before discussing further , firstly we should understand the meaning of Micro & Small Enterprises
In order to be registered under MSMED Act,2006 as Micro Enterprise ,enterprise should fulfill all conditions discussed below-
(a) Investment in Plant & Machinery should not exceed 1Crore
(b) Turnover should not exceed 5Crores.
What are Small Enterprises?
In order to be registered under MSMED Act,2006 as Small Enterprise ,enterprise should fulfill all conditions discussed below-
(a) Investment in Plant & Machinery should not exceed 10Crore
(b) Turnover should not exceed 50Crores.
Now, let us understand further about Sec 43B(h)
Note: Expenses include Purchases as well
If payment to Micro & Small Enterprises has not been made in specified time, then that amount shall be added to the taxable income of assessee in Previous Year of Non Payment of such amount & assessee has to bear the tax liability on such amount. The assessee gets deduction Previous Year in whch payment has been made.
Moreover, According to Noti:RBI/2006-2007/306
If an enterprise not make payment to Micro & Small Enterprises in above specified period, then it has to make payment of compound interest at monthly rests to supplier at 3 times the Bank Interest notified by Reserve Bank Of India.
(It should make payment of interest even if not demanded by Supplier)
U/S 16 this interest expense is in nature of Penal Interest. So interest expense incurred for delayed payment to Micro & Small Enterprises is not allowed u/s 37 of Income Tax Act 1961.
Let us understand with help of Practical Example:
A has sold goods to B on 01 July 2023
A is a Micro Enterprise
B has made payment to A on 01 Feb 2024
As B has made payment to A before 31 March 2024 but after 45 days
According to Income Tax Act 1961,We will allow payment in PY 2023-24. But B has to make payment of compound interest at monthly rests to A at 3 times the Bank Rate notified by RBI even if not demanded by A calculated from due date till date of payment.
Further, this interest expense is disallowed while computing Income under head PGBP.
Section 43B(h) of the Income Tax Act brings attention to the timely payment obligations to Micro & Small Enterprises. Businesses need to adhere to the specified payment periods, failing which disallowances and compound interest may apply. Understanding the implications is crucial for both buyers and sellers in the MSME sector to navigate the tax landscape effectively.