Understanding Section 43B(h) of the Income Tax Act, 1961, for timely MSME Payments in India

posted on Mar 25, 2024

Companies need to make payments to the MSME sector within 45 days, as per the Finance Act 2023, effective from April 1, 2024. Failure to adhere to this timeline will render companies ineligible to claim deductions, with the overdue amount subjected to taxation

The Challenge:

One persistent challenge faced by MSMEs is the delay in receiving payments. To address this issue, the Finance Minister, Nirmala Sitharaman, announced a crucial amendment during the Union Budget for Fiscal Year 2023-24.

The Amendment:

The Finance Act, 2023, brought in the amendment to the Income Tax regime wherein customers/ vendors failing to make payments to micro and small enterprises during the current fiscal will experience a delay in deductions under the Income Tax Act.

This means that the deduction will only be allowed when the payment is actually made, introducing a real-time component to the tax deduction process. Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 mandates payments to micro and small enterprises within 45 days in case of written agreement and 15 days in case of unwritten agreements.

Understanding the term 'Enterprise':

It is also important to understand the meaning of the word “Enterprise” mentioned above. This can be understood with reference to the definition given under the MSMED Act, 2006. Section 2(e) of the MSME Act, defines the term “enterprise” as follows: “Enterprise means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering any service or services”.

On reading the definition of “enterprise” one may note that the enterprise must be engaged in the manufacture or production of goods. Therefore, an enterprise that is engaged in trading is not covered by the term “Enterprise”.

Deduction of expenses on payments to Micro and Small Enterprises (Section 43B(h) of Income Tax Act, 1961):

In order to promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Act.

Accordingly, in section 43B of the Act, any sum payable by the assessee to a “Micro or Small Enterprise” beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as a deduction only on actual payment.

The amendment is coming into effect from Assessment Year 2024-25 starting April 1, 2024.
Any liability that was already outstanding in respect of the period prior to April 01, 2023, will not be hit by clause (h) of section 43B even if it is outstanding as of 31 March 2024 or even subsequent periods.

Whom does it affect?

Special Note:

Note for Enterprises: It is important to have your UDYAM registration number printed in the invoices raised to the customers.
Note for Customers/ Vendors: It is important to maintain the records of invoices-wise payments to the Micro and Small Enterprises in order to arrive at correct figures of expenses allowed as deduction under section 43B and expenses to be disallowed under section 43B.