Navigating How Section 43B(h) Impacts MSME Payments

Introduction to Section 43B(h)?

The Finance Act of 2023 has introduced Section 43B(h) into the Income Tax Act, aimed at encouraging timely payments to Micro, Small, and Medium Enterprises (MSMEs). This provision allows businesses to deduct payments owed to MSMEs in the fiscal year they are made, provided these payments are executed within the timeframe mandated by the Micro, Small and Medium Enterprises Development Act of 2006. This legislative change is designed to alleviate working capital challenges for MSMEs and foster timely financial transactions for these enterprises. This amendment will be applicable from the assessment year 2024-2025 onwards, effective from April 1, 2024.

To further support this initiative, the government has launched the MSME Samadhaan portal, a platform for filing complaints regarding delayed payments. Traditionally, under Section 43B, expenses are deductible if paid by the deadline for filing income tax returns as specified in Section 139. However, Section 43B(h) provides an exception, allowing deductions in the year of payment, even if they are made beyond this deadline.

Understanding Small and Micro Enterprises

?Before diving deeper, it's essential to distinguish between small and micro enterprises:

• Small Enterprises are characterized by annual sales or turnover not exceeding INR 50,00,000 and investment in plant and machinery not surpassing INR 10,00,000.
• Micro Enterprises, on the other hand, have a turnover of up to INR 500,00,000 and an investment in plant and machinery capped at INR 100,00,000.

?

Proactive Steps by the Ministry of MSMEs

?The Ministry mandates identifying MSME vendors by obtaining appropriate classification certificates. According to the MSME Development Act, 2006, payments to MSME vendors must be made within 45 days of a written agreement or, in its absence, within 15 days from the service invoice date or goods receipt. Failure to comply results in the disallowance of these expenses in the relevant year, with allowances only being made upon payment.

?

Section 43B(h): A Closer Look

?This section emphasizes that any sum payable to a micro or small enterprise beyond the MSME Development Act's specified timeframe shall not be barred from deduction under other Act provisions. It's a clear directive encouraging businesses to prioritize MSME payments to avoid adverse financial implications.

?

The MSMED Act, 2006, and Delayed Payments

?The MSMED Act outlines the obligation of businesses to settle payments to MSMEs within specified periods—15 or 45 days based on contractual agreements. Non-compliance means the unpaid amount is added to the taxable income of the business enterprise, thereby increasing their tax liability.

?

Implications of Delayed Payments

?Delayed payments not only strain business relationships but also have stark financial repercussions, including the disallowance of interest under Section 37 of the Income Tax Act, 1961. Tax auditors are now on high alert, with the mandate to highlight non-compliance in tax audits, potentially leading to financial penalties and increased scrutiny.

?

The key points of Section 43B(h)

• Businesses must pay their MSME vendors within 15 to 45 days as mandated by the MSMED Act of 2006.
• Failure to meet these deadlines will result in the addition of the outstanding amount to the business's taxable income.
• Payments without a written agreement must be made within 15 days, while those with an agreement must adhere to the agreed-upon timeline, not exceeding 45 days.

Moreover, the MSMED Act imposes interest penalties for late payments to MSME vendors, emphasizing the serious consequences of non-compliance. Tax auditors are now required to report any non-compliance with Section 43B(h), potentially leading to financial penalties for businesses.

A Future of Financial Diligence

?

The introduction of Section 43B(h) marks a pivotal shift in promoting financial diligence and timely payments within the Indian corporate sphere. As businesses adjust to these changes, the landscape for MSMEs looks promising, with expectations of improved liquidity and reduced capital constraints. This legislative measure paves the way for a more sustainable and equitable business ecosystem, emphasizing the critical role of MSMEs in India's economic fabric.

?

As we edge closer to April 1, 2024, the anticipation grows for the positive impact this amendment is poised to bring. It's a step forward in acknowledging the indispensable contribution of MSMEs to the economy and ensuring they operate in a financially supportive environment.

?