Implications of New Clause (h) in Section 43B of the IT Act, 1961 for MSMEs: A Balancing Act

The Finance Act, 2023, introduced a significant change for Micro, Small, and Medium Enterprises (MSMEs) through the insertion of a new clause (h) in Section 43B of the Income Tax Act, 1961. This article explores the implications of this change and its potential impact on MSMEs.

What is Clause (h) of Section 43B?

Clause (h) stipulates that deductions for payments made to MSMEs will only be allowed when the payment is made within the timeframe specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. This timeframe typically ranges from 15 to 45 days depending on the presence of a written agreement. Previously, deductions were allowed even if payments were delayed, albeit with penalties.

Impact on MSMEs:

Improved Cash Flow: Timely payments from larger businesses can significantly improve the cash flow of MSMEs, aiding their growth and sustainability. This can potentially translate to increased access to working capital, reduced dependence on loans, and improved financial stability.

Reduced Disputes: Clearer payment terms and stricter enforcement can minimize

disputes arising from delayed payments, freeing up time and resources for MSMEs to focus on core business activities.

Greater Bargaining Power: The new clause potentially strengthens the bargaining power of MSMEs, allowing them to negotiate fairer payment terms with larger clients.

Challenges and Concerns:

Compliance Burden: Stricter timelines for receiving payments could add a compliance burden on MSMEs, especially smaller ones, requiring them to track due dates and follow up diligently.

Delayed Payments: Large companies or government entities might face challenges in adhering to the stipulated timelines due to bureaucratic processes or internal approvals. This could still lead to delayed payments for MSMEs, negating the intended benefits.

Unequal Impact: The impact of the clause might be uneven across different MSME sectors. Some industries or businesses with weaker bargaining power might struggle to enforce timely payments. Overall, Clause (h) presents a double-edged sword for MSMEs. While it has the potential to improve their financial health and bargaining power, the effectiveness hinges on ensuring timely payments from larger entities and minimizing compliance burdens for MSMEs.

Additional Considerations:

• The effectiveness of the clause will depend on its implementation and enforcement by tax authorities.
• Awareness campaigns and capacity building initiatives can help MSMEs understand their rights and navigate the new regulations.
• Exploring alternative dispute resolution mechanisms could be beneficial for addressing payment delays.

Conclusion:

The insertion of Clause (h) marks a positive step towards addressing the issue of delayed payments to MSMEs. However, its success depends on addressing the potential challenges and ensuring its implementation in a way that empowers MSMEs while being practical for larger entities. Continuous monitoring and adjustments might be necessary to ensure the clause achieves its intended objectives of promoting timely payments and fostering a healthy MSME ecosystem.