Understanding Section 43B(h) of Income Tax Act, 1961: Timely Payments to Micro and Small Enterprises
Section 43B(h) of the Income Tax Act, 1961, introduced in 2017, aims to promote timely payments to Micro and Small Enterprises (MSEs) by impacting the tax deductions available to larger businesses. It’s a crucial provision for both businesses and their financial well-being. Let’s delve into the details of this section:
Q.1 What does it say?
Ans. This clause states that any amount payable by a business to a registered MSE, if not paid within the timeframe specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), will be eligible for tax deduction only in the year it’s actually paid, not when the liability arises.
Q.2 What’s the timeframe?
Ans. Section 15 of the MSMED Act mandates payments to be made within 15 days from the invoice date if there is no agreement between parties or 45 days from the invoice date if specific payment terms are agreed upon in a written contract.
Payment terms mentioned on invoice can also be treated as a written contract/ agreement.
Q.3 Why is it important?
Ans. Delayed payments are a major challenge for MSEs, impacting their cash flow and hindering their growth. This clause incentivizes larger businesses to make timely payments by linking it to their tax benefits.
Q.4 What are the implications?
For businesses dealing with MSEs:
Ans. Ensure payments are made within the 45-day timeframe to claim tax deductions in the same financial year.
Delayed payments lead to tax deductions being deferred to the year of payment, impacting cash flow planning, as the deduction of the expense will only be allowed in the financial year in which payment is actually made.
Be mindful of interest penalties applicable on delayed payments as per the MSMED Act. According to the MSME Act, buyers are liable to pay interest on delayed payments to MSME suppliers at a rate of three times the bank rate notified by the Reserve Bank of India (RBI).
For MSEs:
Be aware of your rights under the MSMED Act and claim interest on delayed payments.
Consider offering flexible payment terms in written contracts to extend the timeframe if mutually agreed upon.
Remember:
This clause applies only to registered MSEs.
The due date for filing income tax returns remains unaffected by delayed payments.
Conclusion: Section 43B(h) plays a crucial role in promoting financial discipline and timely payments within the business ecosystem. By understanding its implications, both large businesses and MSEs can make informed decisions and ensure a healthy financial environment.
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