Section 43B(h): A Game-Changer for Prompt MSME Payments – Pros vs. Cons ????♂?

?? Introduction -

Micro, Small, and Medium Enterprises (MSMEs) are pivotal in India's economic landscape, driving employment, fostering entrepreneurship, and contributing significantly to GDP. With a diverse presence across sectors, they play a crucial role in export promotion, supply chain integration, and regional development. MSMEs embody adaptability, innovation, and sustainability, making them indispensable to India's economic growth and development.

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Here are some advantages accessible to MSMEs. ??

# The Ascendance of Section 43B(h): Impact and Implications in MSME Transactions-

?? Exploring Section 43B(h): The Finance Act 2023 added one more item to the list in Section 43B by virtue of clause (h), the deduction of which shall be allowed on a payment basis. It provides that any sum payable to a micro or small enterprise (MSEs) beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) shall be allowed as a deduction in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay the sum was incurred, as per the accounting method regularly employed.

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?? Relevance of Section 43B(h): This provision becomes relevant when a business is buying ?goods or availing services from an enterprise registered under the MSMED Act, 2006. It's crucial to highlight that the buyer's registration under the MSMED Act, 2006, is not obligatory. The implementation of Section 43B(h) commences from April 1, 2023.

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?? Definition of Micro & Small Enterprises: To qualify for registration under the MSMED Act, 2006, Micro Enterprises should have investments in plant & machinery not exceeding 1 Crore, with a turnover not exceeding 5 Crores. In contrast, Small Enterprises must keep their investment in plant & machinery below 10 Crores, and their turnover should not exceed 50 Crores. Medium-Scale Enterprises are outside the scope of Section 43B(h).

?? Non-Applicability of section –

This section does not apply to the following persons:

1.????? If the supplier is not registered under the MSMED Act,

2.????? If the supplier is registered under the category of Medium Enterprise,

3.????? If the supplier is registered under the category of traders under the MSMED Act,

4.????? If the assessee files the Income tax return under presumptive taxation i.e. section 44AD,44ADA, 44AE

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?? Payment Schedules for Micro & Small Suppliers: Businesses are required to make payments to Micro & Small suppliers within either 15 or 45 days, contingent upon the existence of a written agreement. In the absence of a written agreement, payments should be completed within 15 days.

Conversely, if there is a written agreement, payments must adhere to the agreed-upon timeline, with the maximum limit being 45 days.

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?? Effect on Taxable Income: Failure to make payments to Micro & Small Enterprises within the designated timeframe results in the amount being considered taxable income for the assessee in the previous year of non-payment. The assessee is eligible to claim a deduction in the year when the payment is made. Furthermore, non-compliance may lead to compound interest obligations to the supplier, calculated at three times the RBI-notified Bank Interest.

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?? Interest on delayed payment to MEME: The interest accrued due to delayed payments to Micro & Small Enterprises is deemed as penal interest and is not permissible under Section 37 of the Income Tax Act. Even if the supplier does not demand it, the enterprise is required to pay compound interest calculated at monthly rests.

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?? Applicability on Traders: As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.

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?? Points to be considered while filing ITR: The tax auditor is obligated to report unsettled dues to micro and small enterprises in Form 3CD of the Tax Audit Report. The taxpayer must incorporate the disallowance reported in Form 3CD back into its total income. Consequently, the taxpayer is obliged to submit its Income Tax Return (ITR), failing which the income-tax department through the Centralised Processing Centre (CPC), Bengaluru, shall add back the disallowance and recompute tax liability while processing the ITR.

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?? Illustrative Scenario: Aleta sells goods to Bella on August 1, 2023. Bella completes the payment on March 1, 2024, which surpasses the permitted 45 days but falls within the fiscal year ending on March 31, 2024. As per the Income Tax Act, the payment is permissible in the previous year 2023-24. Nevertheless, Bella is obligated to pay compound interest to Aleta at three times the RBI Bank Rate from the due date until the payment date. This interest expense for Bella is ineligible for deduction when computing income under the PGBP head.

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??For ease of understanding, please go through the following examples.

Explanation for Example 1: In the given case, the invoice date is 01.01.2024. However, there is no pre-existing agreement between the parties (Buyer & Seller). Therefore, in this instance, the due date as per the MSMED Act is 15 days, resulting in 15.01.2024. The actual payment, however, was made on 10.01.2024, which is both before the due date and prior to the end of the financial year. Hence, in this particular case, the entire purchases made against the specific invoice are deductible in the FY 2023-24.

Similarly, please go through all the examples.

?? Pros-

?? Advocating for Fair Business Practices - This clause promotes punctual payments and discourages the use of delayed payment strategies, cultivating a business environment that is more just and equitable. Ensuring payments are made promptly enhances the cash flow for MSMEs, fostering both their growth and stability.

?? Enhanced Creditworthiness for MSMEs - Punctual payments from purchasers can markedly enhance the creditworthiness of MSMEs, enabling them to secure improved loan terms, access financing more readily, and potentially engage in negotiations for lower interest rates.

?? Lowered Costs for Dispute Resolution - The provision in Section 43B(h) holds the potential to diminish the occurrence of disputes stemming from delayed payments, leading to decreased legal and administrative costs associated with resolving such issues. This proves advantageous for both buyers and MSMEs.

?? Cons-

Industries like textiles and chemicals are facing notable challenges, leading experts to raise concerns about the potential effect on overall economic growth. The worry is that numerous buyers might choose to procure goods from more substantial sectors to evade the mandatory 45-day payment regulation imposed on Micro and Small Enterprises (MSEs). ). Therefore, the introduction of this section might not prove beneficial for Small & Micro Enterprises, as buyers may shift towards other suppliers that are more organized.

??Conclusion –

·???????? Section 43B(h) underscores the importance of timely payments to Micro & Small Enterprises. Adhering to designated payment periods is vital for both buyers and sellers in the MSME sector to manage the tax landscape efficiently. Non-compliance may lead to disallowances, affecting taxable income and incurring additional compound interest obligations. Recognizing these consequences is essential for businesses to cultivate a compliant and thriving environment within the MSME sector.

Thank You.??