To bolster the financial health of Micro and Small Enterprises (MSMEs), the Indian government has introduced pivotal amendments to the Income Tax Act 1961. These changes, particularly Section 43B(h), are designed to ensure timely payments, carrying significant tax deductions and implications for businesses. We will explore the nuances of Section 43B(h), its applicability, and how it influences taxable income.
Inserted by the Finance Act 2023, Section 43B(h) of the Income Tax Act 1961 mandates that any sum payable by the assessee to an MSME beyond the specified time limit in section 15 of the MSME Act, shall be eligible for tax deductions only in the fiscal year in which the payment is actually made. This stipulation dictates that the deduction is claimable solely upon the fulfillment of the payment, regardless of when the liability was recognized.
To elaborate, the proviso to Section 43B, which normally permits an extension for claiming deductions if the payment is made before the income tax return filing deadline, is not applicable to payments under Section 43B(h). This clause underscores the criticality of adhering to payment deadlines for micro and small enterprises.
The MSME Act governs the application of Section 43B(h), which comes into play when an enterprise procures goods or services from a micro or small enterprise registered under the MSME Act. It's crucial to understand that the buyer's registration under the MSME Act is not a prerequisite for Section 43B(h) to apply.
Effective from April 1, 2023, this provision has been incorporated into the Income Tax Act as part of its recent amendments and will be relevant for the assessment year 2024-25 and the years that follow.
To better grasp the implications of Section 43B(h), it's essential to review some key terms defined under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act):
Buyer :In the context of the MSMED Act, the term 'buyer' is defined as any person or organization that acquires goods or avails services from a supplier for a monetary consideration, highlighting the relationship between buyers and sellers.
Supplier: An 'MSME supplier' is defined as a micro or small enterprise that has filed a memorandum with the appropriate authority as specified in Section 8(1) of the MSMED Act. This encompasses entities such as the National Small Industries Corporation, the Small Industries Development Corporation of a State or Union Territory, and other companies, cooperative societies, trusts, or bodies registered under any applicable law and engaged in selling goods produced by micro enterprises or rendering services provided by such enterprises.
Liability of Buyer to Make Payment: Under Section 15 of the MSMED Act, it is mandated that buyers make payment to micro and small enterprises within the time period agreed upon in writing or, if there is no written agreement, before the 'appointed day.' The appointed day is defined as the day immediately following the expiry of 15 days from the day of acceptance or the day of deemed acceptance of any goods or services by the buyer, with the maximum time limit for payment being 45 days.
The maximum time limit for payment to micro and small enterprises, as per Section 15, is 45 days from the day of acceptance or deemed acceptance. If the buyer does not raise an objection in writing within 15 days from the day of delivery or rendering of services, the day of actual delivery or rendering of services is considered the day of deemed acceptance.
The non-payment of sums owed to micro and small enterprises within the specified time frame has significant income tax implications for the taxable income of the assessee. If payments are not made within the stipulated time limit, the outstanding amount becomes taxable income in the previous year of non-payment.
To illustrate the income tax implications, let's consider a scenario where a buyer purchases goods from a micro or small enterprise in the financial year ending March 31, 2024. If the buyer fails to make the payment within the time limit specified in Section 15 of the MSMED Act, the amount owed will be added to the taxable income for the previous year 2023-24. The assessee is then eligible to claim a deduction for the payment in the year it is actually made.
Additionally, as per RBI notification, if payment to a micro or small enterprise is delayed beyond the specified time limit, the buyer is liable to pay compound interest at three times the bank interest rate notified by the Reserve Bank of India. These interest expenses, classified as penal interest, are not allowed as a deduction under Section 37 of the Income Tax Act, further emphasizing the importance of timely payment.
To ensure compliance with Section 43B(h) of the MSME Act, it is crucial for businesses to verify whether their suppliers are registered as micro or small enterprises under the MSMED Act. The registration status can be ascertained by obtaining information from the supplier and confirming that they have filed a memorandum with the appropriate authority.
It is also advisable for MSMEs, particularly micro and small enterprises, to mention their registration status on invoices to facilitate payment compliance by the buyers. This helps buyers easily identify the enterprise's status and ensures adherence to the payment timelines specified in Section 15 of the MSMED Act.
Section 43B(h) of the Income Tax Act 1961 plays a pivotal role in promoting timely payments to micro and small enterprises within the MSME sector. Businesses must prioritize prompt payment practices to comply with the provisions of the MSMED Act and avoid disallowances that can adversely impact their taxable income. By understanding the implications of section 43b and ensuring income tax compliance, businesses can foster a healthy and compliant environment within the MSME sector.
Additional Information: It is worth noting that the investment and turnover criteria for micro, small, and medium enterprises under the MSMED Act are as follows:
- Micro Enterprise: Investment in plant and machinery for MSMEs, specifically micro enterprises, should not exceed Rs. 1 crore, and turnover should not exceed Rs. 5 crore.
- Small Enterprise: Investment in plant and machinery for MSMEs should not exceed Rs. 10 crore, and turnover should not exceed Rs. 50 crore.
These criteria apply to MSMEs engaged in manufacturing, trading, or services, regardless of their type of constitution. Medium enterprises are not covered under Section 43B(h) and do not enjoy the benefits of delayed payment provisions. Buyers should ensure they obtain information about the supplier's status under the MSMED Act to determine their eligibility for the benefits provided by Section 43B(h).