How Delayed MSE Payments Trigger Deferred Deductions for Corporates w.e.f. 1st April 2024: Section 43B(h) Explained

With an effort to improve the liquidity of the Micro Small and Medium Enterprises, the government has brought some changes specifically in Companies Act, 2013. Following the same, the Finance Act, 2023 has inserted a new provision into the Income Tax Act, 1961, that is Section 43B(h). The changes shall come into effect on 1st April 2023. Let’s check what the changes are and how it will affect the big corporations. In the past, companies had the ability to seek tax deductions for costs related to payments to Micro and Small Enterprises ( MSEs ) on an accrual basis, even in cases where the actual payment was delayed. This practice allowed larger corporations to obtain immediate tax advantages, while MSEs frequently experienced prolonged periods of waiting for their receivables, negatively affecting their cash flow and overall financial well-being. Section 43B(h) alters this scenario by specifying that deductions for any payable amount to MSEs will be permitted only in the year when the actual payment is executed, contingent upon adherence to the specified time limits established by the MSMED Act. According to this new provision, the corporates cannot claim the deduction unless they didn't clear the credit to the micro and small enterprises. SECTION 43B(h) “any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him : Provided that nothing contained in this section 55] shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.” Understanding Section 43B(h): The amendment in Section 43B(h) stipulates that any sum payable by the assessee to a Micro & Small Enterprise beyond the specified time limit in Section 15 of the MSMED Act will only be allowed in computing the income of the previous year when the sum is actually paid. This applies regardless of the previous year in which the liability to pay the sum was incurred, following the regularly employed accounting method. APPLICABILITY The amendment is applicable to companies registered as Micro or Small under MSMED Act. The ‘Medium’ enterprises are excluded from this provision. By excluding the same has drawn a number of critics to the amendment by the experts. The purchases of goods or services from Micro and Small Enterprise made on or after 1st April 2023 are covered for this Section 43B(h). Notably, the registration of the buyer under the MSMED Act, 2006, is not mandatory. MICRO AND SMALL Micro Enterprises seeking registration under the MSMED Act, 2006, must have an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, should limit their investment in plant & machinery to not exceed 10 Crores, with a turnover not surpassing 50 Crores. For your information, a medium enterprise, where the investment in plant and machinery or equipment does not exceed 50 crore rupees and turnover does not exceed rupees 250 crores PAYMENT TIMELINE AS PER S. 15 OF MSMED ACT Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, this amendment to section 43B of the Act allows the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMEDAct. IMPACT OF NON-COMPLIANCE OF S. 43B(h) Failure to make payments within the specified time frame transforms the outstanding amount into taxable income for the assessee in the previous year of non-payment. However, the assessee retains the ability to claim a deduction in the previous year when the payment is eventually made. If the business enterprise fails to make payments to Micro and Small Enterprises within the stipulated period mentioned above, it is required to compensate the supplier with compound interest calculated monthly at a rate three times the Bank Interest as notified by the RBI. However, the interest can not be claimed for deduction. CBDT CIRCULAR 01/2024 A circular was released by the department explaining the income tax act provisions amended in the Finance Act, 2023. The circular issued by the CBDT clarified that, with the aim of encouraging punctual payments to micro and small enterprises, such payments have now been incorporated into the scope of section 43B of the Act through the Finance Act of 2023. A new clause (h) has been added to section 43B, specifying that any amount payable by the assessee to a micro or small enterprise beyond the stipulated time limit in section 15 of the MSMED Act will be eligible for deduction only upon actual payment. Notably, it is emphasised that the proviso to section 43B of the Act does not apply to such payments. The circular clarified that this amendment takes effect from 1st April, 2024 and will accordingly apply in relation to the assessment year 2024-25 and subsequent assessment years. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates