43B(h) of Income Tax Act : Payment due to MSE’s, Applicability, Time Limit, Consequences, Disclosure and External Confirmation
Summary: Section 43B(h) of the Income Tax Act, introduced by the Finance Act 2023, mandates timely payments to Micro and Small Enterprises (MSEs) for goods and services. Effective from April 1, 2024, it applies to payments due under the MSMED Act 2006, Section 15. Payments must be made within the same financial year, regardless of accounting methods. This provision applies solely to manufacturers and service providers, not traders. If no payment timeline is specified in the contract, payments must be made within 15 days of acceptance of goods or services. If specified, the due date is the earlier of the agreed timeline or 45 days from acceptance. Failure to meet these deadlines results in the buyer owing compound interest at three times the RBI’s bank rate, under Section 16 of the MSMED Act. Interest is disallowed as a deduction under Section 23 of the MSMED Act. Audited financial statements must disclose unpaid principal and interest, interest paid for late payments, accrued interest, and interest payable in future years. External confirmation from the supplier may also be required for accurate compliance.
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Applicability of Section 43B(h)
Section 43B(h), introduced by the Finance Act,2023 that any payments due to Micro and Small Enterprise (MSEs) for goods or services rendered if not paid u/s 15 of MSMED Act,2006, must be deducted in the same Financial Year, during which payment is made (irrespective of the method of accounting regularly employed by him).
Note: 43B(h), is applicable only to payments made to suppliers that are either manufacturers or service providers, not traders.
Effective Date of applicability of Section 43B(h)
As 43B(h) is applicable from 01 April 2024. This section of payment to Micro and Small Enterprise is applicable from FY 2023-2024 i.e., (AY 2024-2025).
Payment to MSME – Time Limit u/s 43B(h)
- Payment timeline, not specified in an agreement – Payment should be made within 15days from the date of acceptance.
- Payment timeline specified in an agreement – Earlier of:-
a) Due date specified in the agreement or
b) Payment should be made within 45 days from the date of acceptance.
Date of acceptance means goods are delivered or services are completed
Consequences on failure to pay MSME
Interest Applicability and its disallowance
Sec 16 of MSMED Act, 2006:
Where a buyer fails to make payment of the amount to the supplier, as required u/s 15, the buyer shall, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed date or, as the case may be, from the date immediately following the date agreed upon, at 3 times of the bank rate notified by the Reserve Bank.
Note: Above interest is payable notwithstanding anything contained in any agreement between buyer and supplier.
Section 23 of MSMED Act, 2006,
Interest payable u/s 16 of MSMED Act, notwithstanding anything contained in the Income tax Act, 1961, be allowed as deduction, for the purposes of computation of income under the Income-tax Act, 1961.
Disclosures required to be made in the audited Financial Statements
As per section 22 of the MSMED ACT, 2006, a buyer in its audited annual statements is required to furnish the following additional information :
(a) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of accounting year;
(b) the amount of interest paid by the buyer in terms of section 16 along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;
(c) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under the Act.
(d) The amount of interest accrued and remaining unpaid at the end of each accounting year; and
(e) The amount of further interest due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23. “
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