Section 43B(h) of the Income Tax Act, introduced by the Finance Act 2023, emphasizes timely payments to Micro and Small Enterprises (MSEs) for goods and services. This provision comes into effect on April 1, 2024, and is applicable to payments governed by Section 15 of the MSMED Act, 2006. The primary goal is to ensure that payments to MSEs are cleared within the same financial year, regardless of whether the accounting method used is cash or accrual. Notably, Section 43B(h) is applicable only to manufacturers and service providers, excluding traders.
Starting from April 1, 2024, businesses are mandated to pay MSEs for their goods and services within the financial year, provided the payments are governed by Section 15 of the MSMED Act, 2006. Payments must be made by the end of the financial year in which the goods or services were accepted.
It’s important to note that Section 43B(h) only applies to payments made to MSEs classified as manufacturers or service providers. Traders who do not meet these criteria are not covered under this section.
Section 43B(h) becomes effective from FY 2023-2024 (Assessment Year 2024-2025), and it will enforce the timely settlement of dues to MSEs starting April 1, 2024.
No payment timeline specified in the contract: If the agreement between the buyer and the MSE does not specify a payment deadline, the buyer must settle the payment within 15 days from the date of acceptance of goods or services.
Payment timeline specified in the contract: If the contract specifies a payment deadline, the buyer must pay on or before the earlier of the two:
Failure to meet these deadlines results in the accrual of compound interest at a rate three times the Reserve Bank of India’s bank rate, as outlined in Section 16 of the MSMED Act, 2006.
Under Section 16 of the MSMED Act, if a buyer fails to pay an MSE within the prescribed timeline, they are liable to pay interest at a compounded rate with monthly rests. The interest rate is set at three times the RBI’s bank rate. This interest is payable regardless of any contrary agreement between the buyer and supplier.
Moreover, Section 23 of the MSMED Act explicitly disallows the deduction of this interest from the buyer’s taxable income under the Income Tax Act, 1961. Thus, the interest paid for delayed payments cannot be treated as a deductible expense while calculating taxable income.
In line with Section 22 of the MSMED Act, 2006, businesses must provide detailed disclosures in their audited financial statements regarding their transactions with MSEs. These disclosures include:
To ensure compliance with Section 43B(h) and the MSMED Act, companies may need to obtain external confirmations from MSE suppliers. This can help verify the payment status and reconcile any outstanding dues, ensuring accurate disclosures and compliance with the provisions.
Section 43B(h) of the Income Tax Act, along with the provisions of the MSMED Act, serves as a critical legal framework to ensure the timely settlement of payments to Micro and Small Enterprises. By enforcing strict payment deadlines and requiring detailed disclosures in financial statements, this section aims to promote transparency and financial discipline among businesses. Companies should remain vigilant about compliance, particularly as the effective date approaches in FY 2023-2024.
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