The Government has reiterated that Section 43B(h) of the Income Tax Act was introduced to encourage timely payments to Micro and Small Enterprises (MSEs) and address their long-standing working capital challenges.
Minister of State for Finance Shri Pankaj Chaudhary, answering an Unstarred Question in the Rajya Sabha, stated that the provision was rolled out via the Finance Act, 2023, which does not allow tax deductions on payments to micro and small enterprises unless these payments are actually made within the specified durations mentioned under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
Under the MSMED Act, payments to eligible Micro and Small Enterprises (MSEs) must be made within the agreed credit period, which cannot exceed 45 days. Section 43B(h) of the Income Tax Act links the allowability of tax deductions to the actual payment of such dues, thereby encouraging buyers to make timely payments to MSEs.
In Parliament, the question asked for clarification on whether the enforcement of Section 43B(h) had resulted in large and medium-sized buyers cancelling orders from registered MSMEs, shifting to unregistered vendors, or pressuring suppliers to surrender their Udyam registration.
The Government, in answer, exhibited that various measures have been adopted by the Ministry of MSME to enhance the credit flow and ensure timely payments to MSMEs.
It observed that Section 43B(h) was inserted to legislate the 45-day payment timelines specified under the MSMED Act by restricting tax deductions until actual payment is made to eligible Micro and Small Enterprises.
The Government has stated that the provision applies merely to amounts subject to be paid to micro and small enterprises as categorised under notifications issued under the MSMED Act, 2006.
As per the Finance Ministry, the provision was rolled out after consultations with the stakeholders, which include the Ministry of MSME. The aim is to enhance the liquidity for micro and small enterprises by ensuring quicker realisation of dues, lessening their reliance on external financing and reducing the cost of arranging working capital.
The explanation has arrived amid continuing discussions within industry circles for the practical impact of Section 43B(h) on buyer-supplier relationships and compliance provisions.
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Although some stakeholders have expressed concerns, the Government asserts that this provision aims to enhance the financial stability of micro and small enterprises by promoting timely payment practices.
Read More About the Government’s Defence of Section 43B(h)
