The Finance Act, 2023 introduced significant amendments related to Micro, Small, and Medium Enterprises (MSMEs) in India. One of the key changes pertains to payment compliance and deductions for MSMEs.
Definition of MSMEs:
As per the amended definition (June 2020), MSMEs are categorized based on their investment in plant and machinery or equipment and turnover:
1. Micro Enterprise:
- Investment in plant and machinery or equipment does not exceed one crore rupees.
- Turnover does not exceed five crore rupees.
2. Small Enterprise:
- Investment in plant and machinery or equipment does not exceed ten crore rupees.
- Turnover does not exceed fifty crore rupees.
3. Medium Enterprise:
- Investment in plant and machinery or equipment does not exceed fifty crore rupees.
- Turnover does not exceed two hundred and fifty crore rupees.
Section 43B Amendment:
The Finance Act, 2023 introduced an amendment to Section 43B of the Income Tax Act, which impacts the deduction of expenses related to MSMEs. The amendment specifically addresses payments to micro and small enterprises beyond the specified timeline mentioned in Section 15 of the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006.
Section 43B Amendment Details:
1. The proposed amendment disallows the deduction of any sum payable by the assessee to a micro or small enterprise if the payment is made beyond the time limit specified in Section 15 of the MSMED Act.
2. The deduction will be allowed only when the sum is actually paid by the assessee. This means that expenses incurred on MSMEs will not be eligible for deduction unless the payment is made within the specified timeline.
3. However, there is an exception to this rule. If the payment is made on or before the due date for filing the income tax return for the relevant year, the deduction may be allowed if the evidence of payment is furnished with the return.
Remarks:
1. The amendment aims to ensure timely payments to micro and small enterprises, providing them with financial stability and promoting their growth.
2. It is essential for businesses dealing with MSMEs to adhere to the payment timelines specified in Section 15 of the MSMED Act to maintain compliance and ensure the deductibility of expenses.
3. The amendment encourages businesses to prioritize timely payments to MSMEs, fostering a healthy ecosystem for small businesses and supporting the government’s initiatives to promote their growth.
4. It is crucial for businesses to maintain proper documentation and evidence of payments made to MSMEs to avail of the deductions under the Income Tax Act.
5. The amendment highlights the government’s focus on promoting MSMEs and emphasizes the need for businesses to contribute to their development by fulfilling their payment obligations within the specified timelines.
Conclusion:
The amendment to Section 43B of the Income Tax Act, introduced by the Finance Act, 2023, has significant implications for the deductibility of expenses related to MSMEs. Businesses must ensure compliance with the payment timelines specified in Section 15 of the MSMED Act to avail deductions and contribute to the growth of MSMEs in India.