The Finance Act of 2023 inserted a new clause (h) in income tax section 43B that allows deductions made to MSMEs on an actual payment ground rather than the accrual basis if the payment is created within the threshold limit.
Since from 1st April 2023, this section has been applicable. It is critical to scrutinize our activities to bypass any disallowances under the Income Tax Act of 1961, as we approach the end of the year.
Term Limitation Under Section 43B(h)
Under the same clause, the income tax has permitted the credit limit as per section 15 of the MSMED Act, 2006 which specifies that the maximum duration of the credit is 45 days if it was admitted between both parties in writing otherwise it is 15 days in the absence of written agreement. The buyer in the matter of default payment under 15 days/45 days is obligated to pay the compound interest at three times the rates of the banks specified under RBI.
With effect from 1st July 2020, the Amended Definition of MSME
The definition is defined as per the table mentioned below which is a composite criterion:
| In the case of Goods & Services (Both) | Micro Enterprises | Small Enterprises |
|---|---|---|
| Turnover | Less than or equal to INR 5 Crore | Less than or equal to INR 50 Crore |
| Investment in Plant & Machinery | Less than or equal to INR 1 Crore | Less than or equal to INR 10 Crore |
Results if the payments are not made within due time i.e. 15 days/45 days:
| Transaction with MSME | Without writing the terms | In writing the terms | ||
|---|---|---|---|---|
| Revenue/Capital Nature | 15 days under section 2(b)- {day before the appointed day i.e. 15 days} | 45 days from the date of acceptance/deemed acceptance | ||
| Revenue/Capital Nature | 15 days under section 2(b)- {day before the appointed day i.e. 15 days} | 45 days from the date of acceptance/deemed acceptance | ||
| Penalty in case of Default | Compound Interest at three (3) times the bank rates notified by the RBI | Compound Interest at three (3) times the bank rates notified by the RBI | ||
| Disallowance of interest payment | These interest payments are penal in nature and therefore, will not be deemed as business expenditure u/s 37 | These interest payments are penal in nature and therefore, will not be deemed as business expenditure u/s 37 | ||
| In the matter of Default i.e. payment is made after 15 days/45 days but during the same FY 2023-24 i.e. up to 31st March 2024 | These payments will be disallowed along with interest during the FY 2023-2024 under section 43B(h) and its interest shall be disallowed u/s 37(1). But these payments (without interest) will be permitted on a payment basis as and when the payment is made during the pertinent financial year i.e. FY 2024-25 No impact on the given answer while filing the ITR. | |||
| In case of Default i.e. payment is incurred after 15 days/45 days but after 31st March 2024 during the following financial year i.e. FY 2024-25 but after the filing of ITR for the AY 2024-25 (FY 2023-24) | In case of Default i.e. payment is made post 15 days/45 days which crosses 31st March 2024 i.e during the following financial year i.e. FY 2024-25 but before filing the ITR for the AY 2024-25 (FY 2023-24) | |||
| In case of Default i.e. payment is incurred after 15 days/45 days but after 31st March 2024 during the following financial year i.e. FY 2024-25 but after filing of ITR for the AY 2024-25 (FY 2023-24) | ||||
Precautions Must be Taken Previous FY Closing Day, March 31, 2024
- Obtain the MSME Certificates From All the Creditors: To all the creditors send an email and obtain their MSME certificates if any and update these data in your records.
- Launching from Micro and Small Enterprises: In the matter of the suppliers or creditors not furnishing you an MSME certificate since they are not enrolled, confirm that you have opted for an undertaking from all of them in writing.
- Keep Aging of the Creditors: If there are certain creditors’ payments dues, ensure to maintain their ageing so that the credit period can be computed.
- Tax Audit Report: The auditor is needed to ensure that the client/taxpayer has complied with this provision and in the matter of default in payment, such disallowance is to be reported in the Tax Audit Report.
- An effective measure to get an MSME Certificate while placing an order with any vendor and it must be updated each year to ensure the category of the vendor does not count from Micro/Small to Medium/Large Enterprise.
Guidance From the Indian Government
Assure that such an advisory must be followed by vendors if they are registered under the MSME Act:
“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”.
Some FAQs Related to MSME Payments
Q.1 What is the method to identify an entity as MSME?
According to section 8(1) of MSMED Act, 2006, the supplier signifies authority who has filed a memorandum with the authority (i.e. has obtained Udyam Registration), therefore to invoke section 43B(h), the supplier needs to register itself and get the Udyam Registration.
Q.2 What is the method to verify the Udyam Registration Number given by the Supplier?
It could be verified via https://udyamregistration.gov.in/udyam_verify.aspx.
Q.3 Do disallowances draw towards the purchase of capital goods?
Yes, no distinction between capital or revenue expenditure is made under section 43B. Therefore, it applies to both.
Q.4 What does written agreement suggest?
In the act, agreement is nowhere specified hence it might be oral or written but any written document that consists of the agreed time duration will be considered to be the agreement under such provision.
Closure: Rigorous compliance with Section 43B(h) and visionary criteria are crucial to render financial transactions with MSMEs and prevent disallowances under the Income Tax Act.
Is 45 days payment scheme valid for msme registered trading firms?
43B(h) will not be applicable to retail traders as they are not subject to the delayed payment provisions under the MSMED Act.
What if we have Returned the Goods on 31st March and the supplier has not issued credit note in March 2023. Should we reverse the input tax credit or not.
YES, You should reverse the input tax credit.