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