Section 43B(h) of Income Tax and dues to MSME Vendors
Inserted vide Finance Act, 2023 w.e.f. 01.04.2023, clause (h) of Sec. 43B mandates that any sum payable to a registered MSME being a micro or a small enterprise before the due date as per Sec. 15 of the MSMED Act, 2006. Violation of the provision would invite disallowance of the expenditure from computing total income and deduction shall be subsequently allowed only after actual payment has been made.
This above amendment to Section 43B(h) of the Income Tax Act 1961 holds significant implications for any business entities who transact with MSME vendors and their dues. This amendment specifically targets timely payments to micro and small enterprises, as outlined in the MSMED Act 2006. Under this provision, any sum payable by the assessee to a micro or small enterprise, if not settled within the prescribed timeframe as stipulated in MSMED Act 2006, will be included in the business entity/buyer's income.
Micro enterprises, defined as those with investments not exceeding INR 1 crore and turnover not surpassing INR 5 crore, and small enterprises, with investments up to INR 10 crore and turnovers not exceeding INR 50 crore, fall under the purview of this amendment. Payments delayed beyond the stipulated time limit, as per Section 15 of the MSMED Act, are subject to deductions only upon actual payment. Therefore these provision will automatically apply to every MSME vendor whether of not he is registered under MSMED Act 2006.
This amendment disallows accrual basis deductions for delayed payments to MSMEs, emphasizing the importance of honouring payment timelines. Businesses must adhere to the payment terms set forth in written agreements, with a maximum limit of 45 days, or 15 days if no agreement exists. Any payments made beyond these limits will not qualify for deductions unless settled in actuality. Further In terms of Sec. 15 of the MSMED Act, payment terms cannot exceed 45 days. Hence, in a scenario where the payment terms have been set beyond 45 days (say, 60 days), then it shall be restricted to 45 days and due date shall be ascertained accordingly.
To comply with this amendment, businesses must evaluate and structure payments to MSME vendors within the 45-day timeframe, as exceeding this limit will result in disallowed expenses for the relevant financial year. Thus, adherence to the prescribed timelines becomes imperative for both buyers and suppliers within the MSME sector.
THE TAX IMPLICATION IS EXPLAINED IN THE FORM OF EXAMPLE: -
Section 43B(h) of the Income Tax Act 1961 holds significant implications for businesses, particularly regarding timely payments to micro and small enterprises (MSMEs). This provision mandates that if a buyer fails to make payments to an MSME supplier within the specified time limit, the outstanding amount will be added to the buyer's income for taxation purposes. Let's break down the implications with the provided examples:
Example:
Case A: In this scenario, ABC Private Limited availed services from M/s XYZ India Private Limited, an MSME unit, for Rs. 10,00,000. The invoice date is 14/02/2024, and the due date for payment under the MSMED Act 2006 is 29/03/2024. ABC Private Limited makes the actual payment on 10/03/2024, within the financial year 2023-24. As the payment was made before 31.03.2024, the expense deduction is allowed in the FY 2023-24, and the final business profit for income tax purposes remains Rs. 10 lakhs.
Case B: Similar to Case A, the invoice date, due date for payment, and service value are the same. However, ABC Private Limited makes the actual payment on 31/03/2024, which is still within the financial year 2023-24. Consequently, the expense deduction is allowed in the same financial year, and the final business profit for income tax purposes remains Rs. 10 lakhs.
Case C: In this instance, although the invoice and due dates remain consistent with Cases A and B, ABC Private Limited delays the actual payment until 10/04/2024, which is after the end of the financial year 2023-24. As per Section 43B(h), the expense deduction is not allowed in the FY 2023-24 since the payment wasn't made before 31.03.2024. Therefore, the final business profit for income tax purposes increases to Rs. 20 lakhs. An additional Rs. 10 lakhs is added to the profit owing to the disallowance for not paying M/s XYZ India Private Limited, the MSME unit, within the stipulated 45 days.
Implications:
• Section 43B(h) incentivizes timely payments to MSME suppliers by penalizing delayed payments through income inclusion for taxation.
• Businesses must carefully manage their cash flows to ensure prompt settlement of dues to MSME vendors within the prescribed timeframes.
• Failure to comply with payment deadlines can result in increased tax liabilities, affecting the overall profitability of the business.