Section 43B(h) of the Income Tax Act: A New Paradigm for MSME Payments

MSME Payments

Section 43B(h) of the Income Tax Act: A New Paradigm for MSME Payments

MSME Payments

The Finance Act 2023 has introduced Section 43B(h) to the Income Tax Act, aiming to address the persistent issue of working capital shortages in the Micro, Small, and Medium Enterprises (MSME) sector. This amendment mandates that any sum owed to Micro and Small Enterprises (MSEs) for goods supplied or services rendered can be deducted in the same fiscal year if paid within the deadline specified by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Effective from April 1, 2024, this provision applies to the assessment year 2024-25 and beyond.

Key Highlights of Section 43B(h)

Payment Timeframe and Deduction Criteria

The newly inserted clause (h) under Section 43B specifies that any sum payable to a Micro or Small Enterprise, if not paid within the time limits set by Section 15 of the MSMED Act, will only be deductible in the year of actual payment, regardless of the accounting method employed. The MSMED Act stipulates that payments must be made within 45 days if a written agreement exists or within 15 days if there is no written agreement.

MSME Classification Criteria

Micro and Small Enterprises are classified based on their investment and turnover:

  • Micro Enterprises: Investment in plant and machinery not exceeding ₹1 crore and turnover not exceeding ₹5 crores.
  • Small Enterprises: Investment in plant and machinery not exceeding ₹10 crores and turnover not exceeding ₹50 crores.

Applicability and Exclusions

This clause applies when a business procures goods or services from an MSE registered under the MSMED Act. Notably, it is not necessary for the buyer to be registered under the MSMED Act. However, wholesale and retail traders are excluded from this provision, as they are only entitled to Udyam registration for Priority Sector Lending benefits, not for the benefits under Section 43B(h).

Effective Date and Compliance

Section 43B(h) will come into effect from April 1, 2024, and will be applicable from the assessment year 2024-25. Businesses must adhere to the 45-day payment rule specified by the MSMED Act to claim deductions in the same fiscal year. Failure to comply will result in deductions being deferred to the year of actual payment.

Penalties for Late Payment

Late payments to MSMEs attract a penalty in the form of compound interest, calculated at three times the bank rate notified by the Reserve Bank of India (RBI). This interest is payable from the day following the agreed payment period or from 15 days after the acceptance of goods or services, whichever is earlier. Importantly, this interest is not deductible as an expense under the Income Tax Act.

Benefits of Section 43B(h)

For MSMEs:

 

  1. Smooth Payment Cycle: Ensures timely cash flow, crucial for MSME sustainability and growth.
  2. Better Bargaining Power: MSMEs can confidently negotiate payment terms, assured of timely payments.
  3. Reduced Disputes: Minimizes potential disputes and legal issues arising from outstanding dues.

For Larger Enterprises:

 

  1. Tax Planning: Timely payments enable larger enterprises to claim deductions within the same year, reducing tax liabilities.
  2. Compliance and Transparency: Promotes transparent financial practices and adherence to regulations.
  3. Robust MSME Ecosystem: Encourages a healthy MSME sector, benefiting larger enterprises through a reliable supply chain.

Practical Scenarios

  • Invoices from 01.04.2023 to 15.02.2024: If paid by 31.03.2024, expenses are allowable in FY 2023-24.
  • Invoices from 16.02.2024 to 31.03.2024: If paid within 45 days (assuming a written agreement), expenses are allowable in FY 2023-24.
  • Invoices paid after the due date: If payments for March 2024 invoices are made in June 2024, expenses are allowable in FY 2024-25.

How to Verify MSME Registration

To verify MSME registration and the type of enterprise, visit the MSME Portal and use the registration number. Verification can be done through the following link: MSME Registration Verification.

In conclusion, Section 43B(h) is a significant step towards ensuring prompt payments to MSMEs, fostering a healthier business environment, and enhancing the sustainability and growth of the MSME sector. By complying with these regulations, businesses can benefit from smoother operations, better tax planning, and a robust supply chain.

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Understanding Section 43B(h) of the Income Tax Act in Ensuring Prompt Payments to MSMEs

Section 43B(h)

Understanding Section 43B(h) of the Income Tax Act in Ensuring Prompt Payments to MSMEs

Section 43B(h)

Section 43B of the Income Tax Act of 1961 would have a new clause (h) inserted by the Finance bill of 2023. The aforementioned clause, which has been implemented through micro and small businesses, would have been included as a socio-economic welfare measure to ensure on-time payments. The Act’s Section 43B allows for certain deductions to be made on actual payments. The Finance Bill 2023 would have added a new clause to this section that would read as follows:

Section 43B (h)

Any amount that the assessee owes to a MICRO or SMALL enterprise after the deadline set forth in Micro, Small and Medium Enterprises Development Act, 2006, Section 15.

The aforementioned phrase indicates that in order to qualify for the claim reduction of the amount payable to be given to the micro and small firms, the payment must be made within the time frame established in Section 15 of the Micro, Small, and Medium firms Development Act, 2006.

Section 15 Deadline in MSME Act

According to Section 15 of the MSME Development Act of 2006, if a supplier provides any goods or services to a buyer, the buyer must pay the supplier on or before the date that the two parties have agreed upon in writing, or on the designated day in the absence of such an agreement.

With the caveat that the time frame agreed upon in writing by the buyer and supplier may never be longer than 45 days from the acceptance date or the day of considered acceptance.

The buyer will make the payment as per the agreement between the supplier and the buyer. However, the buyer cannot defer payment for longer than 45 days from the acceptance date, also known as the day of considered acceptance, which is the day the goods or services are accepted.

Consequences of Non-compliance with Section 15 Timeframe for MSME Payments

The buyer will be subject to penalties under the new Finance Bill 2023 clause (h) of Section 43B, as well as compensatory interest obligations under Section 16 of the MSME Development Act, 2006, and will be considered an ineligible business expense if they are unable to pay the supplier of goods or services as a company registered as a micro or small enterprise.

(i) Equitable to the Interest:

Regardless of anything stated in it, the buyer is responsible for filing the compound interest with the monthly rests on that amount from the appointed day to the supplier, or if it is from the date immediately following the date agreed upon, at three times the bank’s rate circulated through the Reserve Bank, if any purchaser would be unable to perform the payment of the amount to the supplier as needed under section 15. The RBI repo rate as of is the RBI-notified bank rate for the same topic.

(ii) Outlawing Interest Payments to MSMEs in Exchange for Compensation:

For the Income Tax Act of 1961’s computation, the interest due amount or paid through any buyer under the provisions of Section 23 of the MSME Development Act, 2006, would not be allowed as a deduction.

(iii) Disallowance for Expenses:

Any amount due from the taxpayer for the expenses incurred or the payment for purchases made to the supplier registered as a micro or small firm will not be permitted if the supplier fails to make the payment within the allotted time frame as stated in MSME Development Act, 2006, referenced above, Section 15.

Identification Procedure for Communities under Section 43B(h)

The condition would only apply to the amount owed to the Micro & Small Businesses. Therefore, the amount that must be paid to the Medium Enterprise is eligible for deduction on an accrual basis.

Definition of Enterprise According to MSME Development Act, 2006:

An enterprise, referred to by any name, is a business concern, industrial undertaking, or establishment engaged in the manufacture or production of goods related to industries listed in the First Schedule to the Industries (Development and Regulation) Act, 1951. It can also be involved in providing or rendering any service.

Types of Enterprises as Per MSME Development Act, 2006:

The Central Government has the authority to classify various types of enterprises, including proprietorships, Hindu undivided families, associations of persons, cooperative societies, partnership firms, companies, or undertakings, as micro, small, or medium enterprises. This section overrides Section 11B of the Industries (Development and Regulation) Act, 1951.

Section 43B(h)

The classification of enterprises into Micro, Small, and Medium categories, as outlined in the Micro, Small and Medium Enterprises Development Act, 2006, is provided below for your reference:

Micro Enterprise:
    • Investments below Rs. 1 crore
    • Turnover less than Rs. 5 crore
Small Enterprise:
    • Investments below Rs. 10 crore
    • Turnover less than Rs. 50 crore
Medium Enterprise:
    • Investments below Rs. 20 crore
    • Turnover less than Rs. 100 crore

It is advised for business entities to obtain an annual declaration from their respective suppliers, indicating their classification as micro or small enterprises registered under the Micro, Small and Medium Enterprises Development Act, 2006. This ensures compliance and facilitates purchasers in identifying the enterprise. Micro and small enterprises are encouraged to include a note on their invoices stating their enrollment under the MSME Development Act, 2006, for the convenience of purchasers in understanding compliance requirements.

Commencement Date of New Clause (h) under Section 43B

Starting April 1, 2024, clause (h) of Section 43B becomes effective. This provision mandates the inclusion of any outstanding amounts payable to micro and small enterprises, left unpaid beyond the specified duration in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, into the income calculation under Section 28 of the Income Tax Act, 1961.

Assessment of Section 43B(h) Impact on the MSME Sector

The introduction of clause (h) in Section 43B of the Income Tax Act, 1961 has sparked debates. This clause, applicable from the Assessment Year 2023-24 onwards, pertains to expenses incurred on purchasing goods or services from Micro and Small Enterprises starting April 1, 2023. The definition includes industrial undertakings, business entities engaged in the manufacture or production of goods related to specific industries, or those providing services.

To qualify for deductions, payments must be made within 15 or 45 days, as specified in Section 15 of the MSMED Act 2006. Small enterprises must have investments not exceeding 1 Crore and turnover not exceeding 5 Crores, while medium enterprises should have investments not exceeding 10 Crores and turnover not exceeding 50 Crores. Enterprises involved in trading are excluded.

Despite the specified timeframe, deductions are allowed even if payments are made beyond the stipulated days within the same year, subject to the payment of compounded interest at a rate of 19.5%, which might be deemed high compared to the prevailing RBLR of 6.5%. The interest is considered penal in nature and raises questions about the possibility of waiver.

 

Applicability to All Taxpayers

This provision is seen to apply universally to all taxpayers, extending beyond manufacturers or industries to include professionals who acquire goods or services from MSMEs.

Udyam Registration and Section 43B(h) Benefits

A Chartered Accountancy firm with Udyam Registration can leverage the advantages offered by Section 43B(h). This enables the firm to prompt clients, including Banks and Government enterprises, to settle bills within the specified 15-day period.

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Starting April 1, 2024, MSME Registration and Recognition Status Required for New ITR-5 & ITR-6 Filing.

msme registration

Starting April 1, 2024, MSME Registration and Recognition Status Required for New ITR-5 & ITR-6 Filing.

Intending to simplify tax procedures and promote transparency, the Income Tax Department has implemented substantial revisions to income tax return (ITR) forms, taking effect from April 1, 2024.

msme registration

Intending to simplify tax procedures and promote transparency, the Income Tax Department has implemented substantial revisions to income tax return (ITR) forms, taking effect from April 1, 2024. These changes cover a range of requirements designed to streamline business tax compliance and strengthen reporting standards.

1. Streamlining Business Tax Procedures

Acknowledging the necessity for simplified tax processes, the income tax department has eased the criteria for presumptive taxation as per Section 44AD of the Income Tax Act, 1961. This measure seeks to reduce the tax burden on businesses by incorporating a new section in ITR forms 5 and 6 for reporting cash turnover or gross receipts.

The cash turnover threshold has been increased to Rs. 3 crores, given that cash receipts remain below 5% of the total turnover or gross receipts from the preceding year.

GST Amnesty Scheme

2. Enhanced Requirements for MSMEs in ITR-6 Submission

Companies utilizing ITR-6 to submit income tax returns are now confronted with extra prerequisites, which encompass the necessity to provide the Legal Entity Identifier (LEI), MSME registration number, and details justifying tax audits as per Section 44AB of the IT Act.

The revised form also mandates the disclosure of proceeds from online games under Section 115BBJ of the IT Act and the inclusion of virtual digital assets.

3. Rigorous Reporting Standards for Companies Pursuing Refunds

Companies aiming for refunds exceeding Rs. 50 crores are subject to stringent reporting standards, demanding the Legal Entity Identifier (LEI) provision. Furthermore, ITR-6 mandates the inclusion of acknowledgment numbers and Unique Document Identification Numbers (UDIN) for tax audit reports under Section 44AB of the IT Act and transfer pricing reports under Section 92E of the IT Act.

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