Introduction
The recent amendments to Section 43B of the Income Tax Act, 1961, have significantly impacted the landscape for Micro, Small, and Medium Enterprises (MSMEs) in India. The introduction of Clause (h) in this section has aimed to ensure timely payments to these small enterprises, safeguarding their liquidity and cash flow.
In this comprehensive blog post, we will delve into the intricacies of Section 43B(h), its application, and the implications for MSME businesses in India.
Understanding Section 43B(h)
Section 43B(h) of the Income Tax Act, 1961, was introduced in the Finance Act of 2023. This new clause states that any sum payable by the assessee (the business owner) to a micro or small enterprise, beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, shall be allowed as a deduction while calculating the Income from business or profession, based on the previous year in which such sum is actually paid by the assessee.
Key Highlights of Section 43B(h)
- Applicable Date: The new clause is effective from April 1, 2023, onwards (Financial Year 2023-24).
- Payable by: Assessee, i.e., the business owner or professional.
- What is Payable: Any sum payable to a micro or small enterprise.
- To Whom Payable: To a micro or small enterprise as registered under the MSME Act, 2006.
- Time Limit for Payment: As specified in Section 15 of the MSME Act, 2006.
Understanding the Time Limits for Payments
According to Section 15 of the MSME Act, 2006, the time limits for payments to micro and small enterprises are as follows:
Where no Written Agreement**: Within 15 days
Where Written Agreement Executed: Within 45 days
It’s important to note that any outstanding as of March 31st shall be paid within 15/45 days of the next financial year. If not paid, the outstanding amount shall be added to the taxable income of the previous financial year in which the expense was booked and allowed as an expense in the year it is actually paid.
Consequences of Non-Compliance
The consequences of non-compliance with the payment timelines under Section 43B(h) can be quite significant. Let’s explore the different scenarios:
Scenario 1: Paid within the Time Limit (15/45 Days)
- Tax Deduction: The paid/outstanding amount is allowed as an expense.
- Interest Provision: No interest provisions under Section 16 of the MSMED Act, 2006, are required.
- Allowability of Interest: Not applicable, as the payment was made within the stipulated time.
Scenario 2: Not Paid within the Time Limit (15/45 Days)
- Tax Deduction: The paid/outstanding amount is not allowed as an expense and shall be added to the taxable income in the year in which the expense was booked.
- Interest Provision: Interest is payable at 3 times the bank interest rate as notified by the Reserve Bank of India (RBI).
- Allowability of Interest: The interest is in the nature of penal interest and hence not allowed as an expense under Section 37 of the Income Tax Act.
Applicability Based on Enterprise Type
The provisions of Section 43B(h) are applicable to micro and small enterprises, as defined under the MSME Act, 2006. Let’s understand the classification of enterprises and the corresponding applicability:
Micro Enterprises
- Turnover: Up to ₹5 crore
- Investments in Plant and Machinery (including Equipment): Up to ₹1 crore
- Applicability of Section 43B(h): Applicable
Small Enterprises
- Turnover: Between ₹5 crore and ₹50 crore
- Investments in Plant and Machinery (including Equipment): Between ₹1 crore and ₹10 crore
- Applicability of Section 43B(h): Applicable
Medium Enterprises
- Turnover: Between ₹50 crore and ₹250 crore
- Investments in Plant and Machinery (including Equipment): Between ₹10 crore and ₹50 crore
- Applicability of Section 43B(h): Not Applicable
It’s important to note that the term “enterprise” as defined in the MSME Act, 2006, includes industrial undertakings, business concerns, and other establishments engaged in the manufacture or production of goods, or in providing or rendering services. However, enterprises engaged in trading activities are not covered under this definition.
Practical Scenarios and Examples
To better understand the application of Section 43B(h), let’s explore some practical scenarios and examples:
Scenario 1: Supplier-I (Manufacturer)
- MSME Registered: Yes
- Agreement Executed: Yes
- Enterprise Type: Micro
- Outstanding as of March 31, 2023: ₹50,000
- Supply during FY 2023-24: Nil
- Payment during FY 2023-24: Nil
- Paid within 15/45 Days Limit: N/A
- Outstanding as of March 31, 2024: ₹50,000
- Payment during FY 2024-25: Nil
- Paid in FY 2024-25 within 15/45 Days: N/A
- Amount Allowed in FY 2023-24: Nil
- Amount Not Allowed in FY 2023-24: ₹50,000
Scenario 2: Supplier-II (Manufacturer)
- MSME Registered: Yes
- Agreement Executed: Yes
- Enterprise Type: Small
- Outstanding as of March 31, 2023: ₹1,50,000
- Supply during FY 2023-24: ₹2,00,000
- Payment during FY 2023-24: ₹2,00,000
- Paid within 15/45 Days Limit: Yes
- Outstanding as of March 31, 2024: ₹1,50,000
- Payment during FY 2024-25: ₹50,000
- Paid in FY 2024-25 within 15/45 Days: Yes
- Amount Allowed in FY 2023-24: ₹2,00,000
- Amount Not Allowed in FY 2023-24: Nil
Scenario 3: Supplier-III (Manufacturer)
- MSME Registered: Yes
- Agreement Executed: Yes
- Enterprise Type: Small
- Outstanding as of March 31, 2023: ₹1,50,000
- Supply during FY 2023-24: ₹3,00,000
- Payment during FY 2023-24: ₹2,00,000
- Paid within 15/45 Days Limit: Yes
- Outstanding as of March 31, 2024: ₹2,50,000
- Payment during FY 2024-25: ₹2,50,000
- Paid in FY 2024-25 within 15/45 Days: No
- Amount Allowed in FY 2023-24: ₹50,000
- Amount Not Allowed in FY 2023-24: ₹2,50,000
Advisory and Suggestions for Businesses
To ensure smooth compliance with Section 43B(h), we recommend the following advisory and suggestions for businesses:
- Bifurcate Creditors/Suppliers: Maintain separate accounts for MSME-registered and non-MSME-registered creditors/suppliers in your books of accounts, effective April 1, 2023.
- Obtain Udyam Certificates Ensure that you obtain Udyam Certificates from every supplier and maintain records of the same, along with any amendments in their registration.
- Execute Agreements with Suppliers: Execute written agreements with every supplier, specifying the payment terms of 45 days or less. If no agreement is executed, the default payment term shall be 15 days.
- Regularly Audit Payments: Regularly audit your payments to MSME suppliers and maintain records of any late payments.
- Ensure Timely Payments: Check the payment due dates within 15/45 days before March 31, 2024, and ensure that the payments are made accordingly. Any payments made after March 31, 2024, and beyond the 15/45 days limit shall be disallowed in the FY 2023-24.
- Allocation of Payments: Since there is no clarification on the applicability of Section 43B(h) to outstanding amounts before April 1, 2023, the department may allocate the payments during the year to the older outstanding on a First-In-First-Out (FIFO) basis (where no dispute is lodged/justified). This may result in delayed payments against supplies procured in FY 2023-24, which may be disallowed.
- Applicability to Audited and Non-Audited Assessees: This section is applicable to all assessees, whether audited or non-audited.
Conclusion
The introduction of Section 43B(h) in the Income Tax Act, 1961, has significantly impacted the MSME landscape in India. This new clause aims to ensure timely payments to micro and small enterprises, safeguarding their liquidity and cash flow.
By understanding the intricacies of Section 43B(h), its application, and the potential consequences of non-compliance, MSME businesses can proactively adapt their practices and strategies to navigate this new landscape effectively.
It is crucial for businesses to closely monitor their payments, maintain proper documentation, and seek professional guidance to ensure compliance and maximize the benefits offered by this important amendment.
As the MSME sector plays a crucial role in the Indian economy, these changes in the Income Tax Act have the potential to strengthen the financial resilience and growth of these enterprises, ultimately contributing to the overall economic development of the country.
Don’t let the changes in Section 43B(h) catch you off guard. Contact our expert team today to ensure your MSME business is fully compliant and positioned for success.