Section 43B of the Income Tax Act covers the list of deductions which are allowable only on the basis of actual payment. Clause (h) was inserted to section 43B vide the Finance Act, 2023.
In simple terms, section 43B(h) states that any sum payable by the assessee to micro enterprise or small enterprise beyond the time limit as specified under section 15 of the Micro, Small and Medium Enterprises Development [MSMED] Act, 2006 will be allowed as deduction only after actual payment.
The basic aim towards insertion of section 43B(h) is to promote timely payments to micro enterprise and small enterprise so as to resolve the issue of working capital scarcity being faced by such enterprises.
The current article provides simple explanation to provisions of section 43B(h) of the Income Tax Act along with flowchart and illustrations.
Page Contents
- Simplifying provisions of section 43B(h) of the Income Tax Act –
- Understanding applicability of provisions of section 43B(h) of Income Tax Act
- Important points with regard to provisions of section 43B(h) –
- Illustrations clarifying provisions of section 43B(h) of Income Tax Act –
- Frequently Asked Questions (FAQs) on Section 43B(h) of Income Tax Act
Simplifying provisions of section 43B(h) of the Income Tax Act –
Section 43B(h) of the Income Tax Act states as under –
- A sum is payable by the assessee to micro enterprise and/ or small enterprise towards supply of goods or services;
- Such sum is not paid within the time limit prescribed under section 15 of the MSMED Act;
- Then, in such case, deduction shall be allowed only if the sum is actually paid.
Notably, the provisions of section 43B(h) are inserted vide Finance Act, 2023 and the same are effective only from 1st April 2024.
For understanding above provisions of section 43B(h), it is important to understand some of the provisions of MSMED Act. The same are explained hereunder –
| Provisions of MSMED Act | Details thereof | ||||||
| Section 7(1) of MSMED Act [micro enterprise] | An enterprise is classified as micro enterprise when –
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| Section 7(1) of MSMED Act [small enterprise] | An enterprise is classified as small enterprise when –
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| Section 15 of MSMED Act [liability of buyer to make payment] | The payment should be made within the following time limit –
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Following flowchart sums up the provisions of section 43B(h) in more simplified manner –
Importantly, provisions of section 43B(h) needs to be evaluated only on the amount outstanding as on the end of the Financial Year. Say for example, sum payable on 15th June was paid belated on 15th September, however, since deduction is allowed on payment basis, such sum will be allowable as deduction in the same year. On the other hand, sum payable on 15th March if paid belated on 15th April, deduction in such case will be allowed in the next financial year.
Understanding applicability of provisions of section 43B(h) of Income Tax Act
Provisions of section 43B(h) gets applicable only if –
- Sum is payable to micro enterprise or small enterprise; and
- Sum is paid after due date specified u/s. 15 of the MSMED Act.
Important points with regard to provisions of section 43B(h) –
- Section 43B(h) is applicable only in case of payment to micro or small enterprise. Therefore, it is not applicable in case of payment to medium enterprise;
- Section 43B(h) doesn’t apply to wholesale or retail traders as they are entitled only for the benefit of Priority Sector Lending;
Illustrations clarifying provisions of section 43B(h) of Income Tax Act –
Following table illustrates applicability of provisions of section 43B(h) under different situations –
| Date of acceptance of goods/ services | Date of payment as per agreement | Payment time limit as per section 15 of MSMED Act | Date of actual payment | Applicability of section 43B(h) and allowance of deduction thereof |
| 1st April 2024 | 30th April 2024 | 30th April 2024 | 15th June 2024 | Section 43B(h) will apply and deduction will be available on actual payment i.e. in Financial Year 2024-2025. |
| 31st January 2024 | No written agreement | 15th February 2024 | 15th June 2024 | Section 43B(h) will apply and deduction will be available on actual payment i.e. in Financial Year 2024-2025. |
| 1st May 2024 | No written agreement | 16th May 2024 | 10th May 2024 | Section 43B(h) doesn’t apply as payment made before time limit prescribed u/s. 15 of MSMED Act. |
Frequently Asked Questions (FAQs) on Section 43B(h) of Income Tax Act
1. What is Section 43B(h) in simple words?
In simple words, Section 43B(h) of the Income Tax Act means in case of delayed payment of amount to micro enterprise or small enterprise, deduction will be available only on actual payment of the said amount.
2. How to avoid 43B(h) of the Income Tax Act?
In order to avoid section 43B(h), the buyer of goods/ services is required to make payment to micro or small enterprise within the time limit specified under section 15 of the MSMED Act.
3. What is Section 43B(h) in audit report?
Section 43B(h) requires timely payment to micro or small enterprise by the buyer of goods or services. In case of delayed payment, deduction towards the same will be available only on actual payment.
4. What is Section 43B(h) budget?
Budget 2023 came up with insertion of clause (h) to section 43B of the Income Tax Act. The provisions of section 43B(h) are made effective from 1st April 2024.
5. What is rule of 43B(h)?
Provisions of section 43B(h) mandates timely payment by the buyer of goods or services to micro enterprise or small enterprise. If the amount is not paid within time limit, the same will be allowed as deduction only after actual payment to the enterprise.
Author Bio
1. Can the auditors depend on the Certificate given by the assessee to the effect that list of parties to whom the amounts are outstanding for more than 45 days are not coming under MSME? 2. What about the opening balance outstanding from 01.04.2023 onwards?