The introduction of clause (h) in Section 43B of the Income Tax Act, 1961, through the Finance Act, 2023, effective from April 1, 2023, marks a significant move towards ensuring timely payments to micro and small enterprises (MSMEs) in India. This provision emphasizes the need for businesses to clear their dues to registered MSMEs within the stipulated time frames as per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, particularly under Section 15. Failure to comply with these timelines will result in the non-deductibility of such expenditures while computing total income, with the allowance for deduction only being granted upon actual payment. This change underscores the government's commitment to enhancing liquidity for MSMEs, which play a crucial role in the Indian economy.
Reason for Conjecture
Given the vast number of businesses in India that engage in transactions with MSMEs, this amendment impacts a broad spectrum of taxpayers. It compels entities to reassess their payment schedules and ensure compliance to avoid the adverse tax implications of delayed payments. This is particularly urgent as the fiscal year 2023-24 draws to a close, prompting a review of accounts payable to MSMEs to align with the new legal requirements.
Frequently Asked Questions (FAQs)
What payments are covered under clause (h) of Section 43B?
This clause specifically targets any sums payable to micro and small enterprises, as defined under the MSMED Act, 2006. It aims to ensure timely compensation for these entities, with deductions permitted only upon actual payment for any overdue amounts.
Who qualifies as 'micro' and 'small' enterprises under the MSMED Act?
- Micro Enterprises: Entities with investments in plant and machinery or equipment not exceeding INR 1 crore and turnover below INR 5 crore.
- Small Enterprises: Entities with investments not exceeding INR 10 crore and turnover under INR 50 crore.
How is 'investment' in plant and machinery determined?
The investment value is based on the Written Down Value (WDV) of plant and machinery or equipment as of the end of the financial year, not the acquisition cost. This is crucial for determining an enterprise's classification as 'micro' or 'small.'
Impact on Accrual Basis Deductions
The amendment mandates that deductions for payments to micro and small enterprises can only be made on an actual payment basis if the payment is delayed beyond the MSMED Act's time limits, altering the previous accrual basis allowances under certain conditions in Section 43B.
Time Limit for Payments
Payments to MSMEs must be made within 45 days of the goods or services being received or within the timeframe specified in a written agreement, if shorter. Failure to meet these deadlines results in expenditure disallowance until actual payment.
Impact on Income Tax Filings
Businesses must now meticulously ensure timely payments to MSMEs to claim deductions effectively. Delayed payments necessitate adjustments in tax filings, highlighting the need for robust payment tracking and cash flow management to comply with the new clause.
Treatment of Payments to Traders
Payments to traders, specifically for the purpose of Priority Sector Lending benefits under Udyam registration, do not fall under clause (h) of Section 43B. Thus, delayed payments to traders are not subject to the same disallowance provisions.
Nature of Covered Payments
The clause applies to all sums payable, including both revenue and capital expenditures, affecting the deductibility of such expenses and the claim for depreciation under Section 32 for delayed payments.
Part Payments
Partial payments to MSMEs allow for proportionate deductions, adhering to the principle of deduction upon actual payment.
Written Agreements and Invoices
An invoice can serve as a written agreement for payment terms, and the specifics of such arrangements are critical in determining compliance with the MSMED Act's timelines.
GST Component and Deductibility
The GST component of invoices from MSMEs, if not claimed as input tax credit and treated as an expenditure, is subject to the actual payment rule for deductibility under clause (h).
Use of 'Account Payee' Cheques
The acceptance and clearing dates of cheques or other payment instruments are crucial in determining compliance with the payment timelines.
Applicability to Presumptive Tax Schemes
Entities opting for presumptive taxation under Sections 44AD, 44ADA, or 44AE are exempt from the provisions of clause (h), as these sections override others in the Income Tax Act.
Retroactivity and Applicability
The amendment applies to expenditures incurred from April 1, 2023, onwards, emphasizing its forward-looking application and excluding prior outstanding invoices.
Maximizing Benefits for MSMEs
MSMEs should ensure proper registration, invoice documentation, and proactive communication with clients regarding payment terms to leverage the protections and benefits offered by clause (h) of Section 43B.
Conclusion
The insertion of clause (h) in Section 43B is a pivotal step towards bolstering the operational liquidity of MSMEs in India, demanding greater accountability and timeliness in payments from businesses engaging with this sector. By understanding and adhering to these provisions, companies can avoid potential fiscal penalties and contribute positively to the vitality of the MSME ecosystem, which is integral to the country's economic fabric.
Draft Email to Suppliers
Subject: Request for Confirmation of MSME Registration Status
Dear [Supplier's Name],
I hope this message finds you well. As we continue to build our working relationship, it's important for us to comply with the latest tax regulations to ensure a smooth and efficient partnership.
In light of the recent amendments to the Income Tax Act, specifically Section 43B, we are required to ensure timely payments to our suppliers who are registered under the Micro, Small and Medium Enterprises (MSME) Act. This change aims to improve cash flow and support the growth of businesses like yours.
To align with these new regulations and ensure our compliance, we kindly request you to confirm if your business is registered as an MSME. Additionally, if you are registered, please share your MSME registration details with us. This information will help us in processing your payments within the stipulated timelines and maintaining accurate tax records.
We value our partnership and are committed to supporting your business. Please send us the requested information within 7 days, to help us update our records accordingly.
Thank you for your prompt attention to this matter. Should you have any questions or need further clarification, feel free to contact us.
Best regards,
