Attention all businesses: Buckle up, because time is not your friend when it comes to paying your Micro and Small Enterprise (MSE) vendors! Thanks to a recent amendment in the tax code (Section 43B(h)), lagging payments might leave you scrambling for deductions and facing unexpected tax implications. Don’t get caught napping on this one!

Time Flies When You’re Not Paying Your Bills:

With the insertion of clause (h) in section 43B by the Finance Act, 2023 the provisions of MSMED, Act 2006 have been given a strong enforcement with regards to payment of small businesses. The extract of provision of the Income-tax Act, 1961 is as under:

Section 43B(h) reads as under:

“43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

…. (h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :..”

This provision essentially mandates that any sum payable by a larger enterprise to a registered Micro and Small enterprises as per the MSMED Act, must be paid within the stipulated timeframe as defined in Section 15 of the MSMED Act 2006. This timeframe usually consists of:

  • 45 days: when a written agreement exists between the buyer and seller.
  • 15 days: when no written agreement exists.

If the payment exceeds these deadlines (15 days without a written agreement, 45 days with one), poof! The deduction you were counting on vanishes, just like last year’s resolutions. This change aims to improve cash flow for MSMEs and encourage timely payments.

But Wait, There’s More!

The sting doesn’t stop there. The “save-by-filing-later” loophole is also gone. Delays beyond the stipulated time frame of 15/45 days mean the expense gets disallowed even if you settle before filing your tax return. Put simply, for year-end transactions, the expense is permitted on an accrual basis if the payment is made within the applicable 15 or 45 days; if not, the expense is allowed on a payment basis.

Let’s understand this for FY 2023-24, assuming 45 day’s limit is applicable:

S.NO. DATE OF INVOICE PAYMENT DATE ALLOWED IN YEAR COMMENTS
1 15-03-2024 15-04-2024 2023-24 Paid within Limits, so allowed on the accrual basis
2 01-03-2024 30-06-2024 2024-25 Paid after stipulated time, so allowed on payment basis
3 31-03-2024 14-05-2024 2023-24 Paid within Limits, so allowed on the accrual basis

Tick-Tock Is Your Tax Clock Running Out on MSME Payments

Action Points for Dealing with MSMEs:

(a) If you are buying goods or services from MSMEs:

  • MSE Status: Send a letter to verify your suppliers’ MSE status’. Ask for their Udyam Certificate. Maintain a separate MSE supplier database, tracking due dates and payments.
  • Be familiar with the payment deadlines: Ensure you understand the applicable timeframe according to your agreement or the default 15-day rule.
  • Plan your payments carefully: Factor in the deadlines and adjust your cash flow accordingly to avoid delayed payments and potential interest on delay/tax implications.
  • Document agreements clearly: If entering written agreements, explicitly mention the payment terms and due dates.
  • Seek Expert Advice: If you’re unsure about the specifics of the amendment or have complex situations, consult a tax professional for personalized guidance.

(b) If you are an MSME yourself:

  • Know your rights: Be aware of Section 43B(h) and its implications for your customers’ tax deductions.
  • Highlight payment terms: Clearly emphasize your payment deadlines in invoices and agreements to minimize payment delays. Display Udyam registration on invoices; inform buyers of your MSE status.
  • Consider incentives: Offer early payment discounts to encourage prompt payments from your customers.

(c) Additional Considerations:

  • The provision is applicable from April 1, 2023,
  • It only applies to payments made to registered Micro and Small enterprises under the MSMED Act 2006. Purchases from Medium Enterprises not covered
  • Applies only to purchases from manufacturers and service providers. (Traders under confusion still clarification required)
  • This does not apply to purchases before 01.04.2023, with no disallowance even if unpaid by 31.03.2024.
  • Not applicable to the buyers opting for presumptive taxation.

The clock is ticking, folks! Don’t let delayed MSE payments turn your tax season into a nightmare. Take action today to ensure prompt payments, peace of mind, and a healthy tax bill. Your business (and your wallet) will thank you!

P.S. And the pain doesn’t stop there! Missing those payment deadlines means double trouble:

  • Triple-whammy interest: You’ll be coughing up compound interest at a whopping 3 times the RBI rate, as per Section 16 of the MSMED Act. That’s like paying extra just for being late!
  • Taxation sting: Thanks to Section 23 of the MSMED Act, any interest you pay (or owe) can’t be deducted from your taxable income. So, that interest payment ends up costing you even more on your tax bill.

Conclusion: The clock is ticking, folks! Don’t let delayed MSE payments turn your tax season into a nightmare. Take action today to ensure prompt payments, peace of mind, and a healthy tax bill. Your business (and your wallet) will thank you! But beware, missing those payment deadlines could mean triple trouble with hefty interest payments and taxation stings. Always seek professional advice for tailored solutions to your tax concerns.

Disclaimer: This blog is intended for educational purposes only and should not be interpreted as tax advice. It is crucial to seek guidance from a qualified professional for tailored advice relevant to your circumstances. For any feedback, inquiries, or suggestions, please feel free to reach out to the author at office@camridul.in.

Author Bio

Qualification: CA in Practice
Company: MRIDUL GUPTA & CO.
Location: Delhi, Delhi, India
Member Since: 09 Feb 2019 | Total Posts: 26
Experienced Chartered Accountant with a demonstrated history of working in the financial services industry, skilled in Statutory Audits, Income Tax, GST Compliances, Auditing, Financial Accounting and Financial Reporting. View Full Profile

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