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Section 43B(h) Of Income Tax Act: Applicability, Date, Limit, Example


 

The Finance Act 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro and Small enterprises for goods supplied or services given may be deducted in the same year if it is paid within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

This amendment aims to address the issue of working capital scarcity in the MSME industry and promote prompt payments to micro and small businesses. The assessment year 2024–2025 and any following years will be covered by this change, which will come into effect on April 1, 2024.

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

The newly added clause (h) states that any sum payable by the assessee to a Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed).

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MSME Turnover Limit

Micro and Small Enterprises are classified on the following basis:

Micro Enterprises, means an entity having an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, should invest in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores.

Section 43B(h) Applicability

This clause is applicable when an enterprise is buying goods or taking services from Micro and Small enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006 is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2024.

Example: Mr A (Unregistered under the MSMED Act) purchased Goods from Mr B (Registered under the MSMED Act). Whether section 43B(h) applicable.?

Yes, section 43B(h) applicable as a supplier is registered under MSMED Act.

Section 43B(h) Applicability On Traders

As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.

Example: Mr. A purchased Goods from Mr. B. Mr.B is a trader. Is section 43B(h) applicable?

No, section 43B(h) is not applicable as the supplier is a trader. It is applicable to Manufacturing and services Providers Only.

Section 43B(h) Effective Date

Section 43B Clause (h) is applied from April 1, 2024. This amendment applies from assessment year (AY) 2024-25.

Example: Mr A purchased Goods from Mr B on 31.03.23. Whether section 43B(h) is applicable?

No, section 43B(h) is Not applicable for the purchases made before 31.03.2023.

Section 43B(h) Time Limit

Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In case there is no written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.

Example Of Section 43B (h) 

Sr. No.

Day of acceptance of any goods or services by a buyer from a supplier

Credit period (Days)

Due Date as per MSME ACT

 

Actual date of payment

Deduction allowed in which FY

1

29/03/2024

60

13/05/2024

25/05/2024

FY 2024-25

2

01/04/2024

45

16/05/2024

21/05/2024

FY 2024-25

3

31/01/2024

15

15/02/2024

20/02/2024

FY 2023-24

4

11/09/2023

20

01/02/2023

03/10/2023

FY 2023-24

5

30/11/2023

30

30/12/2023

20/12/2023

FY 2023-24

6

21/04/2024

40

31/05/2024

20/06/2024

FY 2024-25

7

15/12/2023

–

30/12/2023

05/04/2024

FY 2024-25

8

10/11/2023

–

25/11/2023

30/11/2023

FY 2023-24

Penalties For Failure To Pay MSMEs 

In the case of late payment to an MSME, interest is applicable.

Rate of interest: Compound interest at the 3 times the bank rate notified by the Reserve Bank of India (RBI).

Date from which interest is payable: The date as per the agreement or the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier (appointed day), as the case may be.

The deduction of this interest is not allowed as an expense, as per the Income-tax Act (ITA), 1961.

Benefits Of Clause(h) Of Section 43B

Benefits for MSMEs: 

  • Smooth Payment Cycle: Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is 15 days without a written agreement and 45 days with an agreement. This way, MSMEs are assured of timely cash flow, which is important for their sustainability and growth.
  • Better Bargaining Power: The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities. It is possible for them to confidently push for deadlines aligned with the stipulated time frame, as they remain assured of consequences in case of delayed payments. 
  • Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues, are minimised. Thus saving time and resources for both MSMEs and larger businesses alike. 

Benefits For Larger Enterprises: 

  • Tax Planning: While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities. 
  • Compliance and Transparency: Income-Tax Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
  • Strong MSME Ecosystem: Ensuring prompt payments to MSMEs incentivises a robust MSME ecosystem. In the bargain, benefiting larger entities through a vibrant supply chain and ease of access to various resources.

In short, if invoices between 01.04.2023 to 15.02.2024 were paid before 31.03.2024, then Expenses are allowable in FY 2023-2024.

If Invoices between 16.02.2024 to 31.03.2024 were paid within 45 days days, then expenses are allowed in FY 2023-2024.(Assuming a written agreement of 45 Days is present between buyer & Supplier)

If it is not paid within the due date, then it is allowable in the year of Payment only. For Example, If invoices purchased in March 2024 were paid in June 2024, it is allowable as expenses  in FY 2024-25.

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How To Check MSME Registration Status

Through the MSME Portal, one can verify MSME registration and the type of enterprise (Micro/Small/Medium) by the registration number using the following link:

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

Frequently Asked Questions

The newly added clause (h) in Section 43B specifically covers any sum payable by the assessee to a micro or small enterprise. The amendment is introduced to ensure timely payments to such enterprises within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The payments that go beyond the specified time limit under Section 15 of the MSMED Act are covered under this clause and are allowed as deductions only upon actual payment.


 

Businesses that deal with Micro, Small and Medium Enterprises (MSMEs) will need to be more diligent in tracking and ensuring timely payments to these entities. Since deductions for delayed payments to micro and small enterprises can only be claimed upon actual payment, businesses may need to adjust their accounting and tax planning practices. 

This would include potentially revising their cash flow management to accommodate timely payments or facing the tax implications of delayed payments. The amendment highlights the importance of adhering to the payment timelines specified under the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006, to avail of tax deductions efficiently.

Furthermore,  the tax auditor shall be required to report unpaid dues to micro and small enterprises in Form 3CD of the Tax Audit Report. The assessee shall be required to add back to its total income the disallowance reported in Form 3CD of its Tax Audit Report. Accordingly, such assesse will be required to file its Income Tax Return (ITR), failing which the income-tax department through the Centralised Processing Centre (CPC), Bengaluru, shall add back the disallowance and recompute tax liability while processing the ITR.


 

Large enterprises or entities are obligated to pay Micro, Small and Medium Enterprises (MSMEs) within 45 days, depending on the presence of a written agreement. In the absence of a written agreement, payment is required to be made within 15 days. If there is a written agreement, payment shall be made as per the agreed-upon timeline, but not exceeding 45 days.


 

Adhering to Section 43B(h) requires enterprises or entities to adjust their payment processes and ensure they have the necessary documentation and systems in place to verify MSME registration status and track payment deadlines accurately. 

Due diligence in terms of awareness and understanding of these requirements is fundamental to navigating the compliance landscape successfully. 

Section 43B(h) of the Income-Tax Act (ITA), 1961, introduces a significant compliance challenge for entities. However, with a clear understanding of the provision and a proactive approach to managing vendor payments, enterprises can navigate these requirements successfully. The provision, while contentious, highlights the significance of supporting the MSME sector, a critical component of the Indian economy. With further clarifications emerging from the government, businesses should keep themselves informed and adaptable to remain compliant and ensure positive vendor relationships.


 

In case outstanding payments are not made within the prescribed time limit, which cannot exceed 45 days, then that outstanding payable amount shall be added to the taxable income of the taxpayer.  The taxpayer has to bear the income-tax liability on the respective outstanding amount. The assessee gets a deduction in the previous year where payments is made.

In case the business enterprise does not make payments to Micro, Small and Medium Enterprises (MSME) in the above prescribed period, then it has to make payment of compound interest at monthly interests to the supplier at three times bank interest as same is notified by the Reserve Bank of India (RBI).


 

Payments that go beyond the specified time limit under Section 15 of the Micro, Small and Medium Enterprise Development (MSMED) Act. 2006, are covered under clause (h) of Section 43B and are allowed as deductions only upon ‘actual payment’.


 

No, as per the Office Memorandum dated 01.09.2021, retail and wholesale trade MSMEs are excluded. A Supplier who is a micro or small enterprise cannot be treated as a “Supplier” for section 15 and section 43B(h) purposes if his Udyam Certificate shows his activity as only a trader.


 

“Appointed day” means the day immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier


 

No, the registration is not compulsory. However, a Declaration from supplier also be considered for recognising the Micro and Small Enterprises for this purpose of the Section. 


 

Through the MSME Portal, one can verify MSME registration and the type of enterprise (Micro / Small/ Medium) using the registration number provided by the supplier in the following: https://udyamregistration.gov.in/Udyam_Verify.aspx


 

The time limit specified in section 15 is, In case there is no written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.