Under Income Tax Provisions, certain deductions are allowed for Computation of Total Income, if the payments are made within the due dates although appearing in the books of accounts. Sec 43B of the Income Tax Act, 1961 specifies that list of transactions which will be allowed for deduction on payment made within the year and also upto the due date for filing of Income Tax Return.
Finance Act, 2023 introduced new clause 43b(h) effective from AY 1.4.2024 reproduced as below :
Following clause (h) shall be inserted after clause (g) of section 43B by the Finance Act, 2023, w.e.f. 1-4-2024:
(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 (27 of 2006),
In accordance with the above clause, if assessee fails to pay to the MSME (micro or small) vendor within the due date as per MSME Act, 2006, and outstanding as on 31st March, then amount will be disallowed while computation of Total Income and Tax payable will be computed accordingly.
Following are the Turnover criteria for Turnover and Investment in Plant and Machinery
| MICRO | SMALL | MEDIUM | |
| Manufacturing Enterprises and Enterprises rendering Services | Investment in Plant and Machinery or Equipment: Not more than Rs.1 crore and Annual Turnover ; not more than Rs. 5 crore |
Investment in Plant and Machinery or Equipment: Not more than Rs.10 crore and Annual Turnover ; not more than Rs. 50 crore |
Investment in Plant and Machinery or Equipment: Not more than Rs.50 crore and Annual Turnover ; not more than Rs. 250 crore |
The Due date for payment under sec 15 of the MSME Act, 2006 :
Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day:
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
“appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
Explanation.—For the purposes of this clause,— (i) “the day of acceptance” means,— (a) the day of the actual delivery of goods or the rendering of services; or
Failure to make the payments to ‘micro’ or ‘small’ enterprise registered under MSME Act within 45 days (in case of written agreement) or 15 days (in case of no agreement), such purchases/expenses from MSME shall not be allowed in the relevant Financial year as per the Income Tax Act. The said purchase/expense shall be allowed in the year when the payment is made.
In case of failure to pay the amount due to MSME, compound Interest @ 3times of the bank rate as notified by RBI will be applicable and such interest is disallowed under Income Tax.
In view of above provisions, it is pertinent to note the following points :
- Disallowance under Section 43B(h) is specifically applicable when payments are not made to registered “Micro” and “Small” enterprises holding Udyam Registration. “Medium” enterprises are excluded from this provision.
- This clause is applicable only for manufacturing and service Industry and not for traders.
- As this clause is applicable from AY 2024-25, the purchase of goods / services made in FY 23-24 will be disallowed if payment is not made within due date and outstanding as on 31st March, 2024.
- Unlike other cases under Section 43B, where disallowance is waived if payments are made by the due date for filing Income Tax Returns, the same is not applicable in cases of payments to MSMEs under this specific clause.
- The amount so disallowed will be allowed in the computation of Income in the year when actual payment is made.
- Incase of disallowance of the expenses under two heads i.e. under 40(a)(ia) (for non-deduction of payment) or 43B(h) (for non-payment to MSME), the provisions of Section 43B(h) would prevail, as it holds an overriding effect over all other sections of the Income Tax Act.
- Nowadays, it is generally accepted practice, the basic amount of purchase/ services is paid on due date and GST amount is paid only after the GST appears on the GST portal to avail the Input Tax Credit. This practice now needs to be aligned with new provision for MSME payment.
- This clause is applicable to all assesees not limiting to assessee where Tax Audit is applicable.
Following steps are required immediately for the purpose of Advance Tax and Closing of Books of Accounts for FY 23-24:
- Identify the MSME vendors and further categorise under “micro”, “small” or “medium” and update the Master Data of Suppliers. This information is may be accessed through MSME Portal. Link for the same – https://udyamregistration.gov.in/Udyam_Verify.aspx
- Analyze outstanding amounts, categorizing them based on whether they are outstanding since April 1, 2023, or accrued after that date. This categorization aids in planning cash outflow effectively.
- Estimate the amount that will remain outstanding to MSME to make provision of Interest and consider the allowability under this new provision
- Maintain the Invoice wise tracking of amounts expensed out and disallowed under Income Tax. These disallowed amounts will eventually be permitted on a payment basis.
The above provisions are welcome provisions for Micro and small enterprises and though amendments to these provisions were expected in the Union Budget, the Finance Minister is firm on implementing these provisions to ensure that the micro and small enterprises will receive the timely payments.
