Section 43B(h) – New MSME 45 Days Payment Rule

Section 43B(h) – New MSME 45 Days Payment Rule

To safeguard the interests of Micro and Small Enterprises (MSMEs) and ensure their payments are made promptly, Clause (h) in Section 43B, introduced by the Finance Act 2023, stipulates that if payments to MSMEs are not completed within the prescribed timeframe, the deduction of such amounts due to the MSMEs will only be permissible on a payment basis from the profits of the financial year in which the actual payment is made. This change, effective from April 1, 2024, is designed to alleviate working capital shortages in the MSME sector and encourage timely payments to these enterprises. It applies to the assessment year 2024–2025 and subsequent years. This article explores the implications and benefits of this new rule.

New Deduction Norms for Payments to MSMEs – Section 43B(h)

Section 43B(h) of the Finance Act specifies that any amount due to a Micro & Small Enterprise which is not paid within the period prescribed under Section 15 of the MSMED Act will only be deductible in the fiscal year during which it is paid, regardless of the accounting method used. This amendment ensures timely payments to MSMEs by linking the deduction to actual payment dates.

Applicability of Section 43B(h)  

Section 43B(h) applies when an enterprise purchases goods or services from a supplier registered under the MSMED Act, 2006. Importantly, the buyer’s registration under the MSMED Act is not required for this clause to apply. This provision, which encourages prompt payment to registered micro and small enterprises, will take effect on April 1, 2024. This ensures that the benefits of Section 43B(h) are available as long as the supplier is registered under the MSMED Act.

Benefits of Clause (h) of Section 43B for MSMEs 

The inclusion of Clause (h) in Section 43B of the Income Tax Act has significant implications for MSMEs and larger enterprises. Here are the benefits outlined:

• Smooth Payment Cycle: Section 43B(h) encourages large companies to settle their dues with MSMEs within the specified timeframe: 15 days without a written agreement and 45 days with an agreement. This ensures that MSMEs receive timely payments, which are crucial for maintaining their cash flow, sustainability, and growth.
• Better Bargaining Power: With the enforcement of this provision, MSMEs can negotiate payment terms with larger entities more confidently. Knowing that delayed payments have tangible consequences bolsters their negotiation position.
• Reduced Disputes: Timely payments lead to fewer disputes and legal issues related to outstanding dues. This reduction in conflict saves time and resources for both MSMEs and larger businesses, fostering a more harmonious business environment.

Section 43B(h) and Its Non-Applicability to Traders

Section 43B(h) specifically targets timely payments to micro and small enterprises registered under the MSMED Act, 2006. According to Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders can register under Udyam only to avail of Priority Sector Lending benefits. They do not fall under the MSMED Act’s definition of an ‘enterprise’ eligible for other benefits, including those under Section 43B(h).

Example: Mr. A purchased goods from Mr. B, who is a trader. Is Section 43B(h) applicable?

No, Section 43B(h) is not applicable because Mr. B is a trader. The provision applies only to payments made to suppliers that are either manufacturers or service providers, not traders.

Effective Date of Section 43B(h) for MSME Payments

Section 43B(h), introduced in the Finance Act, takes effect from April 1, 2024. This means the amendment applies from the assessment year (AY) 2024-25, corresponding to the financial year (FY) 2023-24.

Example: Mr. A purchased goods from Mr. B on March 31, 2023. Is Section 43B(h) applicable?

No, Section 43B(h) does not apply to purchases made before March 31, 2023. The provision only affects payments for goods and services from April 1, 2024.

Payment Time Limits Under Section 43B(h) for MSMEs

Under Section 43B(h), business enterprises must adhere to specific payment timelines to MSMEs as dictated by Section 15 of the MSMED Act, 2006. These payment terms are contingent on a written agreement between the buyer and the supplier.

• No Written Agreement: If there is no written agreement specifying the payment terms, the business enterprise must pay within 15 days of purchasing goods or services from an MSME.
• With Written Agreement: If there is a written agreement, payments should be made according to the timeline specified in the agreement, provided that this period does not exceed 45 days from the date of acceptance or deemed acceptance of the goods or services.

Here is the structured information about payment timelines for MSMEs under Section 15 of the MSMED Act, presented in tabular format  :

Examples of Section 43B(h) Deduction Applicability

Here are some detailed examples to illustrate how Section 43B(h) applies in different scenarios based on the day goods or services are accepted, the credit period, and the actual payment date.

Penalties for Delayed Payments to MSMEs

When payments to Micro, Small, and Medium Enterprises (MSMEs) are not made on time, the buyer is subjected to stringent penalties under the MSMED Act, 2006. Here are the details of these penalties:

Interest on Late Payment

Rate of Interest: The interest charged on the late payment is compounded at three times the bank rate notified by the Reserve Bank of India (RBI).

Calculation of Interest

Date from Which Interest Is Payable: Interest is payable from the date stipulated in the agreement. If there is no such agreement, interest applies from the day immediately following the expiry of the fifteen-day period from the date of acceptance or the date of deemed acceptance of the goods or services by the buyer.

Non-Deductibility of Interest

According to the Income-tax Act of 1961, any interest paid or payable to an MSME for delayed payments is not allowed as a deduction to calculate taxable income. This rule is designed to incentivize prompt payment to MSMEs and discourage delays.

Implications on GST Component if Sum Payable to MSE is Disallowed

When determining the tax implications of the amount payable to a Micro or Small Enterprise (MSE) that includes GST, it is essential to differentiate based on whether the GST amount is claimed as Input Tax Credit (ITC). Here’s how the implications work out:

Situation Implication on GST Component

• GST Claimed as Input Tax Credit (ITC):  The non-deductible portion of the payment (as per Section 43B(h)) pertains only to the amount excluding GST. The GST portion is treated separately and recognized as an ITC in the financial records.
• GST Not Claimed as ITC:  If the purchaser does not claim the GST amount as an ITC — instead recording it as an expense in the Profit and Loss account — the deductibility of the GST component will depend on whether the conditions under Section 43B(h) are met for the entire payment, including the GST.

Implications on GST Component if Sum Payable to MSE is Disallowed

When determining the tax implications of the amount payable to a Micro or Small Enterprise (MSE) that includes GST, it is essential to differentiate based on whether the GST amount is claimed as Input Tax Credit (ITC). Here’s how the implications work out:

GST as Input Tax Credit

• Condition: The enterprise claims the GST paid on purchases from an MSE as Input Tax Credit.
• Implication: For the purposes of income tax deductions under Section 43B(h), only the base amount (excluding GST) is considered. If this base payment to the MSE is delayed beyond the prescribed timelines, only this portion is disallowed as a deduction until it is actually paid.
• Example: If ₹1,20,000 is payable to an MSE, including ₹20,000 as GST, and this GST is claimed as ITC, then the disallowance under Section 43B(h) applies to ₹1,00,000 (base amount) if not paid within the prescribed time.

GST Not Claimed as Input Tax Credit

• Condition: The enterprise does not claim the GST amount as an ITC, recording the entire amount (including GST) as an expense.
• Implication: The entire amount, including GST, is subject to Section 43B(h) conditions. If the payment (including GST) is not made within the prescribed timelines, the entire amount is disallowed as a deduction until paid.
• Example: If ₹1,20,000 is payable to an MSE, including ₹20,000 as GST, and this GST is not claimed as ITC but recorded as an expense, then the disallowance under Section 43B(h) applies to the entire ₹1,20,000 if not paid within the prescribed time.

Implications of Section 43B(h) on Capital Expenditure

Regarding the tax treatment of various expenditures under the Income Tax Act, the provisions of Section 43B stand out due to their broad applicability, which includes both revenue and capital expenditures under certain conditions. Here’s a detailed exploration of how Section 43B(h) specifically affects capital expenditures:

Overview of Section 43B(h) Applicability

Unlike Section 37(1), which is primarily concerned with the deductibility of revenue expenditure, Section 43B’s criteria for deductibility do not depend on whether an expense is capital or revenue. Section 43B generally allows for the deduction of certain specified expenditures only in the year these payments are made, regardless of the accounting method used by the taxpayer.

Scope of Section 43B(h)

Section 43B covers any sums payable that are otherwise deductible under the Income Tax Act. This means that if a payment to an MSE (Micro or Small Enterprise) is for acquiring a capital asset, the deduction will be governed by the specific provisions that allow such capital expenditure deductions.

Application to Capital Expenditures

Section 43B(h) is relevant for payments made to MSEs related to acquiring capital assets, where a full deduction is permissible under Sections 30 to 36 of the Act. This inclusion means that payments for capital assets to MSEs must also comply with the payment stipulations of Section 43B(h) to be deductible.

Deductions for Specific Capital Expenditures

Notably, the full deduction of capital expenditures under Section 35AD, which allows for certain specified business capital expenditures, and deductions for capital investments in scientific research as stipulated under the same section, fall under this purview.

Therefore, for these specific capital expenditures where deductions are allowed under Sections 30 to 36, Section 43B(h) provisions will apply, ensuring that the deduction is only available in the year the payment is made to the MSE.

Conclusion

In conclusion, Section 43B(h) under the Finance Act 2023 marks a significant step towards supporting Micro and Small Enterprises (MSEs) by ensuring they receive payments within 45 days. This legislation helps alleviate working capital shortages for MSEs, enhances their bargaining power, and reduces payment disputes. For larger enterprises, adhering to this rule means improved tax planning and fostering a more transparent and compliant business environment.

Register Your MSME via IndiaFilings Today!

Ensure your business can leverage all the benefits of the new Section 43B(h) rule by registering your MSME through IndiaFilings. Click here to complete your Udyam Registration smoothly and efficiently.