To promote timely payments to micro and small enterprises, payments made to such enterprises have been included within the ambit of section 43B of the Act vide FA 2023. A new clause (h) has been inserted in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. However, it has also been provided that the proviso to section 43B of the Act shall not apply to such payments.
Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, this amendment to section 43B of the Act allows the payment as a deduction only on a payment basis. It can be allowed on an accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
Frequently Asked Questions (FAQs) on the amendment of Section 43B to get more clarity on the practical applicability of this amendment:
Q-1: From which Financial Year this amendment is applicable?
A-1. This amendment is made applicable from AY 2024-25 i.e. FY 2023-24.
Q-2: Which entities can be categorised as MSMEs?
A-2: Entity can be categorised as MSME – Micro, Small& Medium Enterprises
|Investment in Plant & Machinery or equipment
|Upto Rs.1.00 Crores
|Upto Rs. 10.00 Crores
|Upto Rs. 50.00 Crores
|Turnover (excluding export turnover
|Upto Rs.5.00 Crores
|UptoRs. 50.00 Crores
|Upto Rs. 250.00 Crores
Note that this amendment applies to only Small and Micro Enterprises and does not apply to Medium Enterprises.
Q-3: Whether this amendment can be made applicable for an amount outstanding to micro and small enterprise as on 31/03/2023?
A-3. This amendment is made applicable from AY 2024-25 i.e. FY 2023-24. Hence, this amendment is not applicable for an amount outstanding to micro and small enterprises as of 31/03/2023. It will apply to the transactions from 1st April 2024.
Q-4: To attract the disallowance u/s 43B(h), is it mandatory that supplier should have registration under the MSMED Act?
A-4:From the combined reading of section 8 and section 2(n) of the MSMED Act, 2006, it casts responsibility on MSME units to file a memorandum with the notified Authorities. However, that does not mean that Micro / Small Enterprise, which have not obtained Udyam Registration/filed memorandum are not be considered as Micro / Small Enterprise Creditor for Section 43B(h).An Enterprise, which is not registeredunder MSME but has merely furnished the Declaration in writing clarifying their Type of Enterprise viz. “Micro / Small” are required to be considered as such for all purposes of Section 43B(h) as Micro / Small Enterprise.
Reference is invited to the case below
Case Name: M/s Ramky Infrastructure Private Limited Vs Micro And Small Enterprises Facilitation Council & ANR (Delhi High Court)
Appeal Number: W.P.(C) 5004/2017 & CM No. 21615/2017
Date of Judgement/Order: 04.07.18
However, this is a subjective issue and for the purpose of interpretation in Income Tax, the client may take a decision based on professional advice.
Q-5: How to verify whether a supplier is registered under the MSMED act or not?
A-5.: After the amendment in section 43B(h) in Budget 2023, many suppliers have started to include their MSME registration numbers on their invoices. Through the MSME Portal, one can verify MSME registration and the type of enterprise (Micro/ Small/ Medium) using the registration number. By this way, one can find that whether supplier is registered under MSMED act or not.
Q-6: What if a supplier has not intimated his registration under MSME in any manner to buyer?
A-6.: It is the responsibility of the supplier to intimate its registration to the buyer. If in any case, the supplier has not in any manner intimated his MSME registration, then in the absence of availability of information, no disallowance can be made under section 43B(h).
Q-7: Whether section 43B(h) is applicable for dues outstanding to traders having MSME registration?
A-7: As per section 2(e) of MSMED act, 2006 – “enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951) or engaged in providing or rendering of any service or services. Hence, the definition of enterprise does not include traders.
The Ministry of Micro, Small and Medium Enterprises vide Office Memorandum (OM) No. 5/2(2)/2021-E/P & G/Policy dated July 2, 2021, has allowed Udyam registration for retail and wholesale trade. However, benefits to Retail and Wholesale trade MSMEs are restricted to Priority Sector Lending only. Hence, other benefits available under the MSMED act do not apply to traders. Resultantly benefit of section 15 of the MSMED act is not available to traders and hence 43B(h) cannot be made applicable to dues outstanding to traders.
It is advisable to yearly examine the classification of creditors.
Q-8: If a supplier is engaged in both i.e. trading as well as manufacturing/services, in that situation whether section 43B(h) apply for dues outstanding to that supplier?
A-8.: In such a situation, section 43B(h) can be made applicable for dues outstanding to such suppliers.
Q-9: Can disallowance be attracted under section 43B(h) for dues outstanding in relation to capital expenditure?
A-9.: Section 43B reads as – “Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of……” It is clear from above that 43B can be made applicable only to those deductions which is otherwise available under the Income Tax Act. Capital expenditure is not an allowable expense under the Income Tax Act. Hence, no disallowance will be attracted under section 43B(h) for dues outstanding to capital expenditure.
Q-10: How year-end provisions will be dealt with for disallowance under 43B(h)?
A-10.: As mentioned above, as per section 15 and section 2(b) of MSMED Act, 2006 payment must be made within 15/45 days from the actual delivery of goods or services. Hence, for any provision made for which actual delivery of goods or services does not take place till the end of the year, no disallowance can be made under section 43B(h).
Q-11: what if the buyer makes payment to the supplier after 15/45 days, but before the end of the financial year?
A-11.: In such a situation, a deduction can be claimed in a same financial year as payment is made in the same year.
Q-12: What if the buyer makes payment to the supplier after 15/45 days, but before filing the return of income for that financial year?
A-12.: As per the amendment made in the first proviso to section 43B, the benefit of the first proviso will not be available for due to micro and small enterprises, Hence, though payment is made before filing a return of income, the deduction can only be claimed in the year in which actual payment is made and not in the year of accrual.
Q-13: Disallowance under 43B(h) can be attracted for assessee opting presumptive taxation i.e., 44AD/44ADA/44AE etc.?
A-13: Section 43B does not apply to the assessee opting for presumptive taxation. Hence, no disallowance can be made in such cases.
Q-14: Chargeability of interest on delayed payments to MSME entities:
A-14: In case of failure to pay within the time limit specified in section 15 of the MSME Act, Section 16 charges liability to pay compound interest with monthly rests (i.e. interest will be calculated on the closing balance of the previous month) to the supplier @ Three times of bank rate notified by the Reserve Bank for the period of delay. The amount of interest payable or paid by the buyer shall not be allowed as a deduction under the Income Tax Act, 1961 as per provisions of section 23 of the MSME Act, 2006.
Q-15: Goods reaches late than how to compute the number of days?
A-15: Let us understand the question with the help of an illustration:
X Dealt with an MSME where he received an invoice dated 16 March 2024 with respect to the supply of goods delivered on the same day. E having an issue with regards to the quality of goods supplied, communicated the same to the MSME vendor on 18 March 2024. Both the parties concluded with regards to the dispute on 30 April 2024 and accordingly E made a payment on 31 May 2024.
In this scenario, as a dispute with regards to the invoice was communicated within 15 days of the date of delivery therefore time limit under section 15 of the MSMED Act 2006 is applicable from the date on which dispute is resolved. And accordingly as the payment is made within 45 days from the date on which the dispute was resolved, E will be eligible for deduction of the said payment in the financial year 2023-24 when the expenses accrued.