Understanding Section 43B(h) of the Income Tax Act,1961

Section 43B(h) of Income Tax Act,1961

The Finance Act 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro, Small and Medium Enterprises (MSME) for goods supplied or services given may be deducted in the same year if it is paid within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

In other words, any sum payable by an entity to a micro or small enterprise beyond the time limit specified in Section 15 of the MSME Act, 2006 shall be allowed only in computing the income of the previous year in which the sum has been actually paid.

Objective

This amendment aims to address the issue of working capital scarcity in the MSME industry and promote quick payments to micro and small businesses. By promoting quick payments to micro and small businesses, the aim is to alleviate their financial burden and improve their liquidity. It could improve their cash flow management, reduce reliance on expensive short-term financing options, enhance their ability to fulfil orders and contracts promptly, and ultimately support their growth and sustainability within the broader economy.

Applicability

1. This section shall be applicable from the assessment year 2024–2025, that is, Financial Year 2023-24.

2. Clause (h) of Section 43B comes into effect from April 1, 2024.

3. This clause is applicable when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006, is not mandatory.

4. It is not applicable to transactions on or before 31^st March 2023.

Non-Applicability

This Section is not applicable to:

1. Medium enterprises,

2. Unregistered MSMEs

3. Traders (since their registration on the portal is solely for the purpose of priority sector lending).

Applicability On Goods and Services

1. This section is applicable for the amounts payable on purchase of goods and services.

2. This section is not applicable to:

3. Actionable claims of money

4. Interest on loans

5. Salary payments

6. Capital goods

Due Dates for Payment

In the presence of a written agree	e payment must be made within 45 days from the date of acceptance or deemed acceptance.
In the absence of a written agreement	The payment must be made within 15 days from the date of acceptance or deemed acceptance.

BENEFITS

Benefits for MSMEs: 

• Smooth Payment Cycle: MSME Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is 15 days without a written agreement and 45 days with an agreement. This way, MSMEs are assured of timely cash flow, which is essential for their sustainability and growth.
• Better Bargaining Power: The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities. It is possible for them to confidently push for deadlines aligned with the stipulated time frame, as they remain assured of consequences in case of delayed payments.
• Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues, are minimised. Thus saving time and resources for both MSMEs and larger businesses alike.

Benefits for Larger Enterprises: 

• Tax Planning: While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities.
• Compliance and Transparency: Income-Tax Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
• Strong MSME Ecosystem: Ensuring prompt payments to MSMEs provides a fillip to a robust MSME ecosystem. In the bargain, benefiting larger entities through a vibrant supply chain and ease of access to various resources.

Exceptions

This section does not apply if the buyer is filing income tax returns under Sections 44AD, 44ADA or 44AE (presumptive income) since these sections have an overriding effect over Sections 28 to 43C of the MSME Act, 2006.

Penal Provisions

In case of late payment to an MSME, interest is applicable.

Rate of interest: Compound interest at the times of the bank rate notified by the Reserve Bank of India (RBI).

Date from which interest is payable: Appointed day or the date as per the agreement, as the case may be.

NOTE: Deduction of this interest is not allowed as an expense, as per the Income-Tax Act (ITA), 1961.

Conclusion: Section 43B(h) of the Income Tax Act, 1961, underscores the importance of timely payments to MSMEs, fostering a conducive business environment. It promotes financial stability, transparency, and compliance while benefiting both MSMEs and larger enterprises. Understanding its provisions is crucial for ensuring smooth business operations and nurturing a robust MSME ecosystem.

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Disclaimer:- This Blog is for the purposes of information/knowledge and shall not be treated as solicitation in any manner or for any other purposes whatsoever.

Feel free to contact the author for further clarification at 9953808432 or via mail at cssinghaniaandassociates@gmail.com. The author is the founder of SINGHANIA & ASSOCIATES (Practicing Company Secretaries Firm) based in Delhi.