Section 43B of Income Tax Act

• Tax payments: Any sum payable by the assessee by way of tax, duty, cess or fee and all other types of taxes paid to government by whatever name it is called under the law.
• Contribution towards employee benefits: Sum payable by the employer (assessee) to the employee towards contribution to welfare funds such as provident fund, gratuity or superannuation fund.
• Commission/Bonus: Any sum payable by the employer to the employee as bonus or commission as payment for the services rendered.
• Interest payable on loans: Sum payable as interest on loan borrowed. This includes loan borrowed by the assessee from public financial institution/state financial corporation/state industrial investment corporation in accordance with the terms and conditions under the agreement.
• Interest payable on loan or advance: Interest charges payable by the assessee on loan or advance taken from a scheduled bank in accordance with the terms and conditions under the agreement.
• Leave encashment: Sum paid by the employer to the employee towards encashment of the leave balance.
• Payments to Indian Railways: Payments made by the assessee to the Indian Railways is allowed to be claimed as an expense as and when the payment is made.

Exceptions

The assessee can deduct the payment made under the accrual system of accounting under the following conditions.

1. The books or accounts are maintained by the assessee on mercantile basis.
2. Payment of expenses is made on or before the due date for submission of ITR.
3. The assessee is required to produce evidence of payment, to be filed with the Income tax returns.

Section 43B(h) of the Income Tax Act

The Finance Act of 2023 introduced a significant change with the addition of Section 43B(h) to the Income Tax Act. This new provision directly impacts the financial interactions between large businesses and Micro and Small Enterprises (MSEs). According to Section 43B(h), payments due to MSEs for goods or services can only be deducted from the income of the same financial year if made within the deadlines specified by the MSMED Act of 2006.

This provision is crucial in addressing a common issue faced by MSEs—delays in receiving payments, which often lead to working capital shortages.

Applicability and Implications of Section 43B(h)

Applicability:

Section 43B(h) changes how payments to MSEs are treated for tax purposes. It mandates that payments owed to MSEs must be made within the stipulated timeframe under the MSMED Act, 2006, to be eligible for deduction in the same financial year. This aims to encourage timely payments from large companies, creating a more equitable business environment. 

MSME Turnover Limits:

Under the MSMED Act, 2006, enterprises are categorized based on turnover:

1. Micro enterprises: Turnover up to INR 5 crore

1. Small enterprises: Turnover between INR 5 crore and INR 75 crore

Businesses within these limits qualify for the benefits under Section 43B(h), ensuring better payment practices for MSEs.

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

Section 43B(h) of the Income Tax Act introduces a crucial measure to safeguard Micro and Small Enterprises (MSEs) from financial difficulties caused by delayed payments. This provision mandates that payments for goods or services provided by MSEs must be settled within 45 days from the date of acceptance. If businesses fail to meet this deadline, they risk losing the ability to claim these payments as tax deductions. The aim of Section 43B(h) is to encourage timely payment practices and improve the financial health of MSEs, thereby supporting their growth and stability in the economy.

Implications for Traders

The provisions of Section 43B(h) apply to traders in the following ways:

Applicability to Traders

Section 43B(h) primarily aims to ease the cash flow problems that Micro and Small Enterprises (MSEs) often encounter due to delayed payments. By mandating that payments be made within a specified timeframe, the government seeks to help these small businesses maintain liquidity, continue their operations smoothly, and grow without facing undue financial stress.

For traders and businesses that engage with MSEs, this rule requires strict adherence to the payment deadlines. Compliance is essential not only for fostering good business relationships but also for ensuring tax compliance and taking advantage of tax deductions.

1. This rule came into effect on the 1 April 2024 as per section 43B(h). So, this amendment shall assume charge from the A.Y. 2024-2025 which coincides with the F.Y. 2023-2024.  Time Limit  As per Section 15 of MSMED Act, 2006, the time limits for payments are laid down below:

1. Without Written Agreement: The buyer should make payment within 15 days after receipt of goods or service from MSME if there is no written contract indicating payment conditions.  

1. With Written Agreement: In the case of written agreement, there should be strict adherence to payment terms stipulated therein but payments should be made not exceeding 45 days after receipt by buyer or deemed receipt by him.

Section 43B(h) Example

For example, let's take a situation where a dealer buys products worth INR 5 Lakh from a micro-enterprise. Starting the MSMED Act, this payment should be made within 45 days of the day of supply. Therefore, when he pays the whole sum within this period, they may deduct all income for that financial year which will eventually reduce their tax liability. This is an arrangement that encourages quick payments to MSEs in turn benefitting both traders and micro-enterprises thereby fostering equity as well as sustainable business environment.

Penalties for Late Payments to MSMEs  Timely payments to Micro, Small and Medium Enterprises (MSMEs) are not only vital for ethical business practices but also because of the legislative requirements set forth by the MSME Development Act 2006. Such strict penalties outlined under this Act ensure that MSMEs don’t suffer from working capital problems due to overdue payments from big companies.

Below are some specifics regarding penalties imposed on delayed payment to such enterprises;

 Penalties for Non-Payment of MSMEs within Time Limit  Rate of Interest: If there is any late payment made by an MSME, then compound interest at a rate three times greater than that defined by Reserve Bank of India's (RBI) notified bank rate has been mandated for buyers. Applicability of Interest.

1. Date from Agreement: Where there is a specific date of payment indicated in an agreement, such date shall be the date from which interest will start running.

1. Statutory Payment Period: If there isn't a date for payment that has been agreed upon, the interest penalty will start to accrue on the day that comes after 15 days from the date that the buyer accepts the goods or services, or the date on which acceptance is presumed.

Deduction of Interest Under the Income Tax Act, 1961

Interest paid or payable on overdue amounts to Micro and Small Enterprises (MSEs) cannot be claimed as a deductible business expense under the Income Tax Act, 1961. As per Section 23 of the MSME Development Act, 2006, any interest paid on delayed payments to MSEs is not eligible for deduction when calculating taxable income.

Implications for Businesses

1. Financial Impact: Companies that delay payments to MSEs are required to pay compound interest at a rate three times the RBI’s bank rate, significantly increasing their financial burden. 

1. Tax Consequences: Since the interest on delayed payments cannot be deducted, the effective cost of such interest rises, adding further financial strain. 

1. Operational Considerations: Businesses must set up efficient processes for managing invoices from MSEs to avoid these penalties. Clear contract terms and timely payment procedures are essential to compliance.

Best Practices for Compliance

1. Clear Contracts: Define payment terms clearly in all contracts with MSEs to prevent confusion over deadlines.

1. Timely Payments: Establish internal systems that prioritize swift approval and payment of MSE invoices.

1. Regular Audits: Routinely audit supplier lists and payment terms to ensure compliance with statutory requirements for MSEs.

Benefits of Section 43B(h) of the Income Tax Act

1. Ensures Timely Payments: Helps MSEs maintain better cash flow by ensuring prompt payments.

1. Improves Working Capital Management: Reduces reliance on costly borrowing for MSEs by improving cash flow.

1. Promotes Compliance: Encourages adherence to the MSMED Act, fostering ethical business practices.

1. Strengthens Business Relationships: Builds trust and reliability between MSEs and larger companies by ensuring timely payments.

Steps to Check MSME Registration Status

To check the MSME registration status, follow these steps:

1. Visit the Udyam Registration Portal at udyamregistration.gov.in.

1. Enter the Udyam Registration Number obtained during the registration.

1. Provide necessary verification details, such as PAN or Aadhaar number.

1. Submit the OTP sent to the registered mobile number or email.

1. View the MSME registration status displayed on the portal after successful verification.