As per amendment made by the Finance Act, 2023, payments made by assesses in relation to their businesses or profession to ‘Micro’ or ‘Small’ enterprise registered under Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”), if not made within period specified under section 15 of MSMED Act, then such payment related to Micro or Small Enterprise shall not be allowed as deduction under Income tax laws for that assessment year and rather the same shall be allowed in the year in which payment has been made.
The primary objective of this amendment is to ensure that Micro or Small Enterprises receive timely payments for goods supplied or services rendered. Hence, it places additional responsibilities on businesses to adhere to the payment timelines stipulated under the MSMED Act.
Section 43B: certain deductions to be only on actual payment
Clause (h): 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 Act, 2006, shall be allowed only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.
Section 15 of MSMED Act, 2006:
Section 15 envisages to ensure timely receipt of payment for their goods and services by micro and small enterprises. It casts an obligation upon the buyer of any goods and services, to make the payment to the supplier, by the specified date as follows:
(a)When there is an agreement in writing: On or before the date agreed upon between them in writing but not later than 45 days from the date of acceptance or the day of deemed acceptance.
(b) When there is no agreement: Before the appointed day, which means the day following immediately after the expiry of 15 days from the day of acceptance or day of deemed acceptance.
Buyer means a person buying any goods or receiving any services from a supplier for consideration.
Supplier means a micro or small enterprise which filed a memorandum under section 8(1) and includes (a) National Small Industries Corporation, (b) Small Industries Development Corporation of a state/Union Territory, and (c) a registered company. Co-operative society, trust or body, selling goods or rendering services produced or provided by micro or small enterprises.
Day of acceptance means
(a) The day of actual delivery of goods or rendering of services, or
(b) Where the buyer makes any objection in writing within 15 days from the day of delivery of goods or rendering the services, the day on which the supplier removes such objection.
Day of deemed acceptance means the day of actual delivery the goods or rendering the services, where the buyer makes no objection in writing within 15 days from such day.
For Example:
Mr. A received an invoice and goods on 25.03.2024 from Micro or Small Enterprise.
• If there is written agreement then payment has to be made maximum within 45 days i.e. by 09.05.2024 or,
• If there is no written agreement, then payment to be made within 15 days i.e. by 09.04.2024.
Now,
Scenario 1 – There is a written agreement of 45 days and Mr. A makes payment on 15.05.2024 then it would be disallowed for AY 2024-25 as payment is made after specified date and will be allowed as deduction in AY 2025-26.
Scenario 2 - There is a written agreement of 45 days and Mr. A makes payment on 22.04.2024 then it would be allowed for AY 2024-25 itself even though the payment is made after close of the financial year as the payment has been made within specified due date defined under Section 15.
Scenario 3 - There is no written agreement and Mr. A makes payment on 15.04.2024 then it would be disallowed for AY 2024-25 as payment is made after specified date of 09.04.2024 and will be allowed as deduction in AY 2025-26.
Scenario 4 - There is no written agreement and Mr. A makes payment on 08.04.2024 then it would be allowed for AY 2024-25 itself even though the payment is made after close of the financial year as the payment has been made within specified due date of 09.04.2024 defined under Section 15.
Applicability of section 43B(h) of Income Tax Act, 1961:
This section is applicable only for the payment to Micro and Small Enterprises registered under MSMED Act.
Non-Applicability of section 43B(h) of Income Tax Act, 1961:
This section is not applicable on the following persons:
i. If the supplier is not registered under MSMED Act,
ii. If the supplier is registered under the category of Medium Enterprise,
iii. If the supplier is registered under the category of traders under MSMED Act,
iv. If the assessee files the Income tax return under presumptive taxation i.e. section 44AD,44ADA, 44AE
Verification of UDYAM Registration Number:
Anyone can verify the UDYAM Registration Number to check Section 43B (h) applicability. The link to access is: https://udyamregistration.gov.in/Udyam_Verify.aspx
Examples on Section 43B(h)
Invoice date | Due Date as per MSME Act | Actual Date of Payment | Deduction Allowed in FY |
01-03-2024 | 15-04-2024 | 18-04-2024 | Allowed in FY 2024-25, Disallowed in FY 2023-24 |
20-03-2024 | 04-04-2024 | 18-04-2024 | Allowed in FY 2024-25, Disallowed in FY 2023-24 |
01-03-2024 | 15-04-2024 | 14-04-2024 | Allowed in FY 2023-24 |
20-03-2024 | 04-04-2024 | 03-04-2024 | Allowed in FY 2023-24 |
01-03-2024 | 16-03-2024 | 01-04-2024 | Allowed in FY 2024-25, Disallowed in FY 2023-24 |
16-03-2024 | 31-03-2024 | 01-04-2024 | Allowed in FY 2024-25, Disallowed in FY 2023-24 |
FAQ’s
1. How will the buyer know whether the supplier is registered under MSME Act or not? The buyer needs to obtain a written declaration from the supplier regarding their registration status under the MSME Act. Alternatively, the buyer can also get the MSME registration number from the supplier and check their status on https://udyamregistration.gov.in/udyam_verify.aspx .The buyer needs to confirm that he is registered as a “Manufacturer” only and not as “Trader” as the latter is not covered under it.
2. What if payment is payable for invoices on or before 31st March 2023?
Since Section 43B(h) is applicable on the invoice issued on or after 1st April 2023. So, if any sum payable against invoices for goods and services dated on or before 31st March 2023, then Section 43B(h) is not applicable.
3. Can payment made after the due date be carried forward for deduction?
Payments that go beyond the specified time limit under Section 15 of the Micro, Small and Medium Enterprise Development (MSMED) Act. 2006, are covered under clause (h) of Section 43B and are allowed as deductions only upon ‘actual payment’.
4. Whether the provision of Section 43B(h) applies to purchase of capital goods from MSME Supplier? No, the expenses which are allowed in Profit and Loss Account can only be disallowed. The purchase of capital goods is not an expense, so there arises no question of its disallowance.
5. Are the balances which are outstanding as on 31.3.2023 are also covered and liable to be paid? No, only the balances which are outstanding as on 31.3.2024 and which are due for more than 45 days (in case of written agreement, otherwise 15 days) are covered.
6. Whether the entire invoice amount is to be disallowed or only the purchases’ part? Only the purchase part is to be disallowed if the GST is not debited to P&L otherwise the full amount.
7. I have paid the amount due as on 31.3.2024 on 10.04.2024, i.e. before the due date of filing the ITR, will it be allowed then? No, the proviso is very much clear and excludes clause (h) from its purview. Therefore, the amount would not be allowed and be disallowed also if its being paid before the due date.
8. If I am declaring income under section 44AD/ADA, then will the provision be applicable?No, the provisions of section 43B(h) will not be applicable to section 44AD/ADA since it starts with “Notwithstanding anything to the contrary contained in sections 28 to 43C” and section 43B(h) comes between it.
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