SME Timely Payments Alert: Make Payments by March 31, 2024 to ensure Section 43B(h) Compliance

This article discusses the amendment to the Income Tax Act that impacts how certain deductions are calculated for payments made to micro and small enterprises ( MSMEs ) and its impact on the payments made to SMEs after March 31, 2024.

To claim a deduction for a payment to an MSME, the payment must be made within the timeframe specified in the MSMED Act, which is typically 15 days.

If the payment is made late, the deduction will not be allowed until the following assessment year. This amendment only applies to payments made to MSMEs that are registered with the Udyam portal.

Businesses that make payments to MSMEs should be aware of this new amendment to ensure they are claiming deductions correctly. To comply, businesses should:

Make payments to MSMEs within the specified timeframe.

Verify that the MSME is registered with the Udyam portal before making a payment.

By following these steps, businesses can avoid any potential issues with claiming deductions for payments to MSMEs.

So, for an invoice raised on 10-02-2024, the payment is to be made by 31-03-2024, to avoid delayed deductions.

The following checklist is useful to ensure timely compliance: Comprehensive Year-End 43B(h) Checklist —

1. Initiate communication with all vendors to confirm their MSME status and obtain their Registration Certificates for the fiscal year 2023-24. If there’s no response, review their Invoices, Purchase Orders, etc., where they may have indicated their MSME status.

2. Determine whether vendors qualify as Small or Micro enterprises. Note that if they fall under the ‘Medium’ category, 43B(h) does not apply.

3. Identify whether vendors are engaged in trading, manufacturing, or providing services. If they are ‘traders,’ 43B(h) does not apply.

4. Verify whether payments made to vendors pertain to “Capex” items. If so, 43B(h) is not applicable.

5. Check for any existing written contracts regarding payment terms. If none exist, consider establishing written agreements with vendors.

6. Determine the due date, which is calculated from the date of goods/services delivery, acceptance, or deemed acceptance ( 15/45 days from such date ).

7. Ensure timely payment by issuing a cheque on or before the due date, which will be considered the ‘date of payment.’

8. Review any advance payments made to MSEs and consider deducting them under section 43B, even if they are not reflected in the Profit and Loss Account.

9. Ensure that no interest is payable to MSMEs, as such interest is disallowed.

10. In case of any lapses, assess your status as a trust or if tax is payable under Minimum Alternate Tax ( MAT ), or if you fall under presumptive taxation as per Sections 44AD, 44ADA, 44AE, 44BBB, or 115VA. In such scenarios, you are exempt from the stringent requirements of Section 43B(h) of the Income Tax Act.

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