Do Not Delay Payment to MSMEs - Ignoring This New Rule Could Lead to Higher Income Taxes - Section 43B(h) of Income Tax Act
Everything you need to know about - Section 43B(h) of Income Tax Act - Disallowance of Delayed Payment to MSMES
The Ministry of Finance has introduced a new rule called Section 43B(h) of the Income Tax Act to make sure payments to MSMEs are made on time.
Applicability of Section 43B(h)
Applicable from the financial year 2023-24 (assessment year 2024-2025)
This clause applies when a business purchases goods or services from an enterprise registered under the MSMED Act, 2006.
It's essential to understand that the buyer's registration under the MSMED Act is not required.
As per the MSMED Act:
Micro Enterprise:
A business where investment in plant & machinery or equipment does not exceed Rs. 1 crore and turnover does not exceed Rs. 5 crore.
Small Enterprise:
A business where investment in plant & machinery or equipment does not exceed Rs. 10 crore and turnover does not exceed Rs. 50 crore.
Section 43B(h) requires you to only count payments to Micro and Small Enterprises (MSEs) as expenses when you actually pay them
In other words, purchases or expenses will be disallowed under Section 43B(h).
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cificlly applies to Micro and Small Enterprises, excluding Medium Scale Enterprises
Condition for Applicability of Section 43B(h)
Situation | Time limit |
Incase of a Written Agreement | Payment to be done within the time-limit decided by buyer and seller which can be maximum 45 days. |
No Agreement | Payment to be done within 15 days of purchase |
Examples of Section 43B(h)
If you buy from an MSE seller on March 1, 2024, and you have 15 days to pay but don't, those purchases won't count as expenses unless you pay by March 31, 2024.
If you buy from an MSE seller on March 1, 2024, and you agreed to pay in 40 days, the expenses will count even if not paid by March 31, 2024.
If you buy from an MSE seller on February 1, 2024, and you agreed to pay in 90 days, but as per the MSMED Act, you must pay in 45 days. If not paid by March 31, 2024, those expenses won't count.
Key points
It doesn't cover purchases from medium enterprises.
It applies only to purchases from manufacturers and service providers.
Purchases made before April 1, 2023, are not affected, even if unpaid by March 31, 2024.
Even if payment is made before filing the income tax return, it will only be allowed in the year of payment.
If there's a dispute, the timeline starts after dispute resolution.
It doesn't apply to buyers opting for presumptive taxation.
It applies to all buyers, whether they are MSME or non-MSME.
Supplier | Micro | Small | Medium |
Manufacturer | Yes | Yes | No |
Service Provider | Yes | Yes | No |
Trader | No | No | No |
Actions Points for Buyers
Verify your suppliers' MSE status by requesting their Udyam Certificate through a formal letter.
Maintain a separate database for MSE suppliers, keeping track of payment due dates and actual payments.
Ensure that no outstanding payments to MSE creditors exceed 15/45 days as of March 31, 2024.
Establish payment terms with MSE suppliers in advance to avoid misunderstandings.
Monitor payments and outstanding balances to MSE suppliers regularly.
Guidelines for Sellers
Clearly display your Udyam registration on invoices to inform buyers of your MSE status.
Include a specified credit period of up to 45 days on your invoices for clarity.
If you are not registered under Udyam, consider seeking guidance from an MSME consultant for assistance.
Consequences of Failure to Pay MSMEs within the Time Limit:
Late Payment Interest:
Interest will be applicable if payment to MSMEs is delayed.
Interest Rate:
Compound interest at three times the bank rate notified by the Reserve Bank.
Start Date of Interest:
Interest starts accruing from the appointed day or the date specified in the agreement, as applicable.
Non-Deductibility:
This interest cannot be deducted as an expense under the Income Tax Act.
Impact on different sectors:
Experts Warn of Challenges with New Payment Rules for MSEs
The new rule regarding payments to micro and small enterprises (MSEs) has had a significant impact across various sectors. Experts suggest that the central government should consider allowing buyers to make payments until the filing of returns, similar to other clauses of Section 43B of the Income Tax Act. Sectors such as textiles and chemicals have been particularly affected, with experts expressing concerns about its potential impact on growth. There is a fear that many buyers may opt to purchase goods from larger industries to avoid the compulsory 45-day payment rule imposed on MSEs.
Conclusion
It's crucial for businesses interacting with MSMEs to grasp the intricacies of the recent Section 43B amendment. Adhering to payment deadlines and accurately categorizing suppliers in financial records are vital steps to prevent disallowances and maintain compliance. With the government's ongoing support for MSMEs, businesses need to remain vigilant and proactive in adjusting to these regulatory shifts.
