Timely Payments to MSMEs: Decoding Section 43B(h) of Income Tax Act , 1961

Introduction: 

The Finance Act, 2023, introduces significant changes with the insertion of clause h in section 43B of the Income Tax Act, strengthening the enforcement of MSME payment regulations. This analysis dives into the implications for small businesses, examining the provisions of the Income Tax Act, 1961, and the MSMED Act, 2006. Particularly, section 43B(h) is explored, addressing the disallowance of expenses for payments not made within the specified time limit. The article delves into the definitions of micro, small, and medium enterprises (MSMEs) and the crucial payment periods outlined in the MSMED Act. 

Section 43B (h): “any sum payable by the assessee to a MICRO or SMALL enterprise beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006,”

The enterprise category as Micro, Small & Medium as described in the Micro, Small and Medium Enterprises Development Act, 2006 is made for your reference:

Micro Enterprise

• Investments less than Rs. 1 crore
• Turnover of less than Rs. 5 crore

Small Enterprise

• Investments less than Rs. 10 crore
• Turnover less than Rs. 50 crore

Medium Enterprise

• Investments less than Rs. 50 crore
• Turnover less than Rs. 250 crore

Meaning thus that payment to all MSME parties is to be made maximum within 15 days of date of invoice or 45 days of date of invoice, if there is a specific agreement regarding the same. In other words, all the invoices received during the financial year 2023-24, invoices till 15-2-24 (provided there is a specific agreement) needs to be paid till 31-3-2024 if disallowance under Sec 43B is to be avoided.

Note: MSME Act specifically states that payment terms cannot go beyond 45 days from date of invoice.

Failure to Pay MSMEs within the Timeframe Specified in Section 15 Resulting in Negative Outcomes

The buyer who is not able to perform the payment to the supplier of goods or services as a company enrolled as a micro or small enterprise, will get smashed through the new insertion of Finance bill 2023 vide clause (h) of Section 43B moreover to the compensatory interest liability as levied through the section 16 of MSME Development Act, 2006 and is indeed an ineligible business expense. The outcomes shall be-

• (i) Compensatory of the Interest: In which any purchaser would unable to perform the payment of the amount to the supplier as needed under section 15, in any agreement made between the buyer and the supplier or in any regulation for said time the buyer will notwithstanding anything specified in it is responsible to file the compound interest with the monthly rests on that amount from the appointed day to the supplier or according to the case from the date immediately following the date agreed on, at 3 times of the rate of the bank circulated through the Reserve Bank. RBI notified bank rate for the same subject is the RBI repo rate as on.

• (ii) Prohibition of Interest Payments Made as Compensation to MSMEs: the interest payable amount or paid through any buyer under the provision of Section 23 of MSME Development Act, 2006, will not be for the purposes of the calculation of the income under the Income Tax Act, 1961 permitted as a deduction.

• (iii) Expenditure Disallowance: For the expenses made any sum liable to be paid by the taxpayer or the payment for the purchases to the supplier enrolled as a micro or small enterprise will not be authorized when it does not pay in the specified time duration in 15 of the MSME Development Act, 2006, cited above.

Payment Timelines

Payments to MSEs beyond the limits specified in Section 15 of the MSME Act, 2006 are subject to the amendment i.e., 15/45 days. Deductions for such payments are allowed in the year of payment rather than the year of due.

For example, where goods are supplied and accepted on 30-03-2024, the due date for payment under Section 15 of the MSMED Act shall be computed as follows:

Date of acceptance of supply	Credit period	Due date for payment	Remarks
30-03-2024	30 days	28-04-2024	Due date as per terms of the agreement
30-03-2024	60 days	13-05-2024	Due date cannot exceed 45 days from the date of acceptance
30-03-2024	No agreement	13-04-2023	In the absence of an agreement, the due date cannot exceed 15 days from the date of acceptance

If the payment is made on or before the due date specified in the third column, no disallowance shall be made under Section 43B(h).

Applicability and Exclusions

• Effective from AY 2024-25, not applicable for outstanding amounts as of 31/03/2023.
• Applies only to Micro or Small Enterprises, excluding Medium Enterprises.
• Applicable only to payments for creditor outstanding as of 31-03-2024.
• Not applicable to assessee opting for presumptive taxation under section 44AD/44ADA/44AE.
• Buyer is not mandatory to be MSME.
• 
  

Interest Obligations

Delayed payments incur compound interest obligations to the supplier, with rates linked to the RBI-notified Bank Interest.

Is the disallowance under Section 43B applicable if supplies are made before obtaining Udyam registration?

Section 43B(h) will not apply with respect to payments for supplies made before the date of Udyam Registration. He would be regarded as a micro-enterprise only from the date of obtaining such registration as Udyam Registration does not operate retrospectively.

What if the amount outstanding at year-end (i.e., 31-03-2024) is paid in the next financial year 2024-25 but beyond the time allowed by Section 15 of the MSMED Act?

Where the amount outstanding at year-end is paid next year beyond the time allowed in Section 15 of the MSMED Act, such amount shall be disallowed while computing the business income for the current financial year 2023-24. However, this disallowance is not permanent or irreversible. Where the amount outstanding at year-end is paid next year but beyond the limitation period of Section 15 of the MSMED Act, such amount shall be allowed while computing the business income in the next FY 2024-25 on an actual payment basis.

How to verify if the Udyam Number furnished by the supplier by printing on the invoice or otherwise is genuine?

Search his Udyam Registration Number on the Udyam Portal under the newly enabled "Verify Udyam Registration Number" at the following link

https://udyamregistration.gov.in/udyam_verify.aspx

How can an assessee identify that his supplier is a micro or small enterprise?

It is the duty of the supplier to mention his MSE status on supply orders, invoices, letterheads and other relevant documents. In the absence of suppliers mentioning their MSE status on their supply orders, invoices, letterheads and other relevant documents, it would be very difficult for the assessee to identify MSE suppliers, and their dues, disclose them in annual accounts, comply with Section 15 and for auditors of buyer entities to verify required disclosures in annual accounts.

The Government of India had also issued OM No.2(28)/2007-MSME(Pol), dated 26-08-2008, which clarifies that 'it is advisable that the Micro or Small Enterprises should mention/get printed on their letterheads, supply order sheets, invoices, bills and relevant documents, the Entrepreneurs Memorandum (EM) number...., so that there always remains an identification of being an MSE supplier."

The above circular seems to absolve the assessee and his auditors of any blame if their non-detection or omission of disclosures of dues to MSEs is due to suppliers not mentioning their Udyam Registration Numbers on their letterheads, invoices, bills and other relevant documents. Possibly, the buyer entity would also be absolved of obligations under Sections 15 and 16 of the MSMED Act in such a situation.

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