The Big Buzz on Small Payment Delays: Business Brief About Section 43B(h) of the Income Tax Act, 1961

by Neha Raheja

Partner, Direct Tax

The Finance Act 2023 introduced a pivotal amendment to the Income Tax Act of 1961 by adding subsection (h) to Section 43B. This amendment, effective April 1, 2024, emphasizes timely payments to micro and small enterprises (MSMEs).

The section outlines specific criteria for allowable expenses and disallowances, impacting the taxable income computation of enterprises. As per the amendment,

If any amount remained outstanding to MSME supplier as of March 31st, which is not paid within 45 days or period agreed between the buyer and supplier in writing, whichever is earlier, shall be disallowed;
If any amount remained outstanding as of March 31st and was not paid within 15 days when there was no agreement between buyer and supplier in writing, it shall be disallowed.

To summarize, if any sum payable to micro & small enterprises (suppliers) is not paid within the time limit mentioned above, then expenses are not allowed as deductions while computing the taxable income of an enterprise. Those expenses will be allowed only after payment is made to the supplier.

Consequences for failure of MSME Payments U/s 43(B) (h) of the Income Tax Act, 1961:

Govt started a Portal to launch Complaint for Delayed Payment – MSME Samadhaan.
In case outstanding payments is not made within prescribed time, then that outstanding payable amount shall be added to taxable income of Taxpayer & That Taxpayer has to bear Income tax liability on respective outstanding amount. The Assessee gets deduction in previous year where payments is made.
In case outstanding payments is not made within prescribed time, then that outstanding payable amount shall be added to taxable income of Taxpayer & That Taxpayer has to bear Income tax liability on respective outstanding amount. The Assessee gets deduction in previous year where payments is made.

Some Important Point to be considered:

This amendment takes effect on April 1, 2024, and will accordingly apply in relation to the assessment year 2024–25 (i.e, FY 2023–24) and subsequent assessment years.
To identify the enterprise and ensure due compliance, it is advisable for business entities to take an annual declaration from their supplier indicating that they are micro or small enterprises registered under the Micro, Small, and Medium Enterprises Development Act, 2006.
This section applies to micro and small enterprises only, and amounts payable to medium enterprises will not be governed by Section 43B(h).
This section is not applicable to those enterprises that show their income on a presumptive basis.
This section is not applicable for dues outstanding with respect to capital expenditures incurred.
Though payment is made after 15 or 45 days but 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.
In case there is a dispute between buyer and supplier, in that case, as per the MSMED Act, the day on which such objection is removed by the supplier shall be treated as the day of acceptance, and the payment has to be made before the appointed day, which will be the day following immediately after the expiry of the period of fifteen days from the day of acceptance.

Uncertainties and Potential Impacts

Order Cancellations
Several reports have emerged of large companies cancelling orders from smaller suppliers, fearing non-compliance with the rule’s deadlines. This can have a devastating impact on MSME’s particularly those already facing financial constraints.
Compliance Challenges
The rule requires robust internal systems for large companies to track invoices and ensure timely payments. Implementing such systems can be time-consuming and expensive, especially for smaller businesses.
Contractual Disputes
The interpretation of “written agreements” could lead to disputes between suppliers and buyers. This ambiguity creates uncertainty and hinders smooth business transactions.

Way Forward

Even though, the government has tried its best to clarify the provisions of these acts through a number of notifications and OMs, due to the involvement of multiple acts and types of business activities, there are a number of challenges in the practical implication of Section 43B(h), which can be described below. The government can provide clarification in respect of these issues and can help in smoothing the implication of the provision in § 43B(h).

The CBDT should provide a list of MSEs to whom this clause is applicable. This list can be considered the last day of the preceding year.
It can be specifically clarified that disallowance will not be applicable to trading activities, even though these are being provided by MSEs.
It should be specifically mentioned by the government that the provisions of 43B(h) are applicable only to registered enterprises.

Conclusion

In view of the discussion above, this amendment to Section 43B is a boom for the growth of micro and small enterprises. It will accelerate their performance due to timely payments to them and no default from the buyer side. On the other hand, it will lead to high tax consequences for the buyers if a delay happens in their actual payment. Hence, we have to ensure timely payments to the MSME’s.