As the financial year draws to a close, it is imperative for businesses to ensure compliance with Section 43B(h) of the Income-tax Act, 1961. This provision, introduced to safeguard the interests of Micro and Small Enterprises (MSEs), has significant implications on tax computation, financial reporting, and statutory audit requirements.
Provisions of Section 43B(h) and Its Impact
Section 43B(h) mandates that any payment due to a Micro or Small Enterprise under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 must be made within the prescribed timeline. If the payment is not made within the statutory time limit, it shall be disallowed as an expense while computing taxable income in that financial year.
Taxation and Compliance Consequences
Increase in Taxable Income: Any outstanding MSME dues beyond the permissible credit period (45 days for agreements with a written contract and 15 days otherwise) are added back to the business's taxable income, leading to increased tax liability.
Disallowed Expenses: Unlike other expenses which are deductible based on accrual, unpaid MSME dues will not be allowed as an expense unless cleared within the prescribed period.
Higher Tax Outflows: If businesses fail to comply, they may face an unexpected tax burden due to disallowed expenses, potentially impacting cash flows.
Clause 22 of Form 3CD (Tax Audit Report): Auditors are required to report details of unpaid MSME dues, increasing scrutiny from tax authorities.
Interest Liability: As per the MSMED Act, buyers are liable to pay interest on delayed payments at three times the bank rate notified by RBI, leading to additional financial costs.
Reputational and Legal Risks: Non-compliance may result in legal action from MSME vendors, reputational damage, and loss of credibility in business dealings.
Financial Statement Disclosures & Year-End Challenges
Disclosure in Financial Statements: Companies must report outstanding MSME payments separately under the Companies Act, 2013, adding to financial statement preparation complexities.
Grouping in Books of Accounts: Proper classification of vendors as MSME or Non-MSME is crucial due to the implications of Section 43B(h). Incorrect classification can lead to misstatements, tax disallowances, and audit risks.
Impact on Profitability & Liabilities: Unpaid dues will reflect as liabilities, increasing debt obligations and impacting key financial ratios.
Year-End Complications: Businesses rushing to clear payments at the last moment may face liquidity issues, making proactive compliance essential.
Action Plan for MSME Compliance Before Financial Year-End
To avoid financial and compliance risks, businesses should undertake the following steps:
Vendor Classification & MSME Declaration: Obtain written confirmation from vendors regarding their MSME status and collect their Udyam Registration Certificates where applicable.
Reconciliation of MSME Dues: Identify outstanding MSME payments and ensure clearance before 31st March to prevent disallowance under Section 43B(h).
Proper MSME Grouping in Books: Ensure that vendor classification is correctly recorded in accounting systems to avoid errors in tax computation and audit disclosures.
Internal Audit & Compliance Review: Conduct a year-end audit to ensure compliance with tax and reporting obligations.
Maintain Proper Documentation: Keep records of payment schedules, contracts, and communications with MSME vendors to avoid disputes.
Draft Email for MSME Confirmation
Subject: Urgent – Confirmation of MSME Classification & Udyam Certificate Submission
Dear Business Partner,
We sincerely appreciate your association with us. As part of our statutory compliance obligations, we request you to provide confirmations on the following:
Confirmation of whether your entity is a “MSME” entity or “Non-MSME” entity by filling in the enclosed Annexure-1.
If your entity is classified as an MSME, kindly provide the latest Udyam Registration Certificate downloaded from the MSME portal.
This is a time-sensitive activity, and we require your response on or before 20th March 2025. Responses received after 21st March 2025 will not be considered, and in the absence of feedback or failure to share the Udyam Certificate, your entity will be considered as a Non-MSME in our accounting records for the financial year 2024-25.
Kindly ensure that the subject of this email remains unchanged while responding.
Thank you for your cooperation.
Best regards,
[Your Name]
[Your Designation]
[Company Name]
[Contact Information]
MSME Declaration Format
Subject: Vendor Classification as per MSME Act, 2006
Dear [Recipient’s Name],
We certify the following details about our enterprise as requested:
| Details | Information |
|---|---|
| Name | [Enter Business Name] |
| Address | [Enter Address] |
| PAN | [Enter PAN] |
| GSTIN | [Enter GSTIN] |
| Nature of Enterprise | [ ] Manufacturer |
| [ ] Trader | |
| [ ] Service Provider | |
| Classification as per MSMED Act, 2006 | [ ] Micro Enterprise |
| [ ] Small Enterprise | |
| [ ] Medium Enterprise | |
| [ ] None of the Above |
If classified as Micro or Small Enterprise, please attach a self-attested copy of the latest downloaded Udyam Registration Certificate.
Declaration:
I, [Name], hereby certify that the above information is true and correct to the best of my knowledge. I understand that any misrepresentation may lead to regulatory consequences.
Signature: ____________________
Name: ____________________
Designation: ____________________
Place: ____________________
Date: ____________________
Final Compliance Reminder
With stricter regulations and increased scrutiny, businesses must ensure timely payment of MSME dues to avoid tax disallowances, penalties, and audit risks. As the financial year-end approaches, it is crucial to act now and ensure that all outstanding dues are cleared within the permissible period.
