Attention Businesses! Check Section 43B(h) Compliance Before March 31, 2025!
The Finance Act 2023 introduced Section 43B(h), requiring timely payments to Micro & Small Enterprises (MSMEs) for tax deductions. 💰
Key Points:
Payments to MSMEs beyond the Section 15 time limit of the MSME Act, 2006, won’t be deductible in the same financial year
Payment Deadlines:
With Agreement – Pay within the agreed period or 45 days, whichever is earlier.
No Agreement – Pay within 15 days from acceptance of goods/services.
⚠ Non-Compliance:
❌ Late payments increase taxable income by disallowing expenses!
📌 Exemptions:
🚫 Not applicable to capital goods or presumptive taxation taxpayers.
💡 Check Compliance Before March 31, 2025!
Pay outstanding MSME dues by the deadline to claim deductions in FY 2024-25.
📌 Example: See our infographic for real-world applications!
✅ Ensure MSME compliance for tax benefits and to avoid disallowances!
MSME Section 43B(h): New MSME 45 Days Payment Rule
The newly added clause (h) states that any sum payable by the assessee to a Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed).
MSME Turnover Limit
Micro and Small Enterprises are classified on the following basis:
Micro Enterprises, means an entity having an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, should invest in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores.
Section 43B(h) Applicability
This clause is applicable when an enterprise is buying goods or taking services from Micro and Small enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006 is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2024.
Example: Mr A (UnRegistered under the MSMED Act) purchased Goods from Mr B (Registered under the MSMED Act). Whether section 43B(h) applicable.?
Yes, section 43B(h) applicable as a supplier is registered under MSMED Act.
Section 43B(h) Applicability On Traders
As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.
Example: Mr. A purchased Goods from Mr. B. Mr.B is a trader. Is section 43B(h) applicable?
No, section 43B(h) is not applicable as the supplier is a trader. It is applicable to Manufacturing and services Providers Only.
Section 43B(h) Effective Date
Section 43B Clause (h) is applied from April 1, 2024. This amendment applies from assessment year (AY) 2024-25.
Example: Mr A purchased Goods from Mr B on 31.03.23. Whether section 43B(h) is applicable?
No, section 43B(h) is Not applicable for the purchases made before 31.03.2023.
Section 43B(h) Time Limit
Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In case there is no written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
Example Of Section 43B (h)
| Sr. No. | Day of acceptance of any goods or services by a buyer from a supplier | Credit period (Days) | Due Date as per MSME ACT | Actual date of payment | Deduction allowed in which FY |
| 1 | 29/03/2024 | 60 | 13/05/2024 | 25/05/2024 | FY 2024-25 |
| 2 | 01/04/2024 | 45 | 16/05/2024 | 21/05/2024 | FY 2024-25 |
| 3 | 31/01/2024 | 15 | 15/02/2024 | 20/02/2024 | FY 2023-24 |
| 4 | 11/09/2023 | 20 | 01/02/2023 | 03/10/2023 | FY 2023-24 |
| 5 | 30/11/2023 | 30 | 30/12/2023 | 20/12/2023 | FY 2023-24 |
| 6 | 21/04/2024 | 40 | 31/05/2024 | 20/06/2024 | FY 2024-25 |
| 7 | 15/12/2023 | – | 30/12/2023 | 05/04/2024 | FY 2024-25 |
| 8 | 10/11/2023 | – | 25/11/2023 | 30/11/2023 | FY 2023-24 |
Penalties For Failure To Pay MSMEs
In the case of late payment to an MSME, interest is applicable.
Rate of interest: Compound interest at the 3 times the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is payable: The date as per the agreement or 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 (appointed day), as the case may be.
The deduction of this interest is not allowed as an expense, as per the Income-tax Act (ITA), 1961.
Benefits Of Clause(h) Of Section 43B
Benefits for MSMEs:
- Smooth Payment Cycle: Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is 15 days without a written agreement and 45 days with an agreement. This way, MSMEs are assured of timely cash flow, which is important for their sustainability and growth.
- Better Bargaining Power: The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities. It is possible for them to confidently push for deadlines aligned with the stipulated time frame, as they remain assured of consequences in case of delayed payments.
- Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues, are minimised. Thus saving time and resources for both MSMEs and larger businesses alike.
Benefits For Larger Enterprises:
- Tax Planning: While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities.
- Compliance and Transparency: Income-Tax Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
- Strong MSME Ecosystem: Ensuring prompt payments to MSMEs incentivises a robust MSME ecosystem. In the bargain, benefiting larger entities through a vibrant supply chain and ease of access to various resources.
In short, if invoices between 01.04.2023 to 15.02.2024 were paid before 31.03.2024, then Expenses are allowable in FY 2023-2024.
If Invoices between 16.02.2024 to 31.03.2024 were paid within 45 days days, then expenses are allowed in FY 2023-2024.(Assuming a written agreement of 45 Days is present between buyer & Supplier)
If it is not paid within the due date, then it is allowable in the year of Payment only. For Example, If invoices purchased in March 2024 were paid in June 2024, it is allowable as expenses in FY 2024-25.