Critical Issues on MSMEs Under Section 43B(h) of Income Tax Act

Section 43B(h) of the Income Tax Act, effective from April 1, 2023, impacts timely payments to micro and small enterprises (MSMEs) by imposing disallowances for delayed payments and affecting the taxable income of the assessee. It is applicable to all purchases made from enterprises registered under the MSMED Act, 2006, specifically for micro and small enterprises. Medium scale enterprises are exempt. Payment to micro and small suppliers should be made within 15 or 45 days, depending on the presence of a written agreement. Failure to do so will result in the amount being added to taxable income, with interest payable to the supplier, even if not demanded. The interest expense incurred for delayed payments to micro and small enterprises is not allowed under Section 37 of the Income Tax Act, considering it to be penal interest. An example illustrates the application of the provisions, where payment made after 45 days incurs compounded interest at 3 times the bank rate, even if not demanded by the supplier, and is disallowed when computing income under the head PGBP.

Implications of Section 43B(h) of the Income Tax Act on Payments to Micro and Small Enterprises: Explore the implications of Section 43B(h) of the Income Tax Act, a crucial amendment aiming to ensure timely payments to Micro & Small Enterprises (MSMEs). Effective from April 1, 2023, this section imposes disallowances for delayed payments, impacting the taxable income of the assessee.

This clause is applicable on all types of Purchases made from the enterprise which has been registered under MSMED Act,2006. This clause is applicable on Micro & Small Enterprises. Medium Scale Enterprises are outside the ambit of this clause.

Section 43B(h) states that any sum payable by the assessee to a micro & small enterprises beyond the time limit specified in Section 15 of Micro ,Small and Medium Enterprises Development Act 2006 shall be allowed only in computing the income referred in Section 28 of that previous year in which sum has been actually paid (irrespective of the previous year in which liability to pay sum was incurred by assessee according to the method of accounting regularly employed)

Applicability of Clause (h) of Section 43B:

This clause is applicable when an enterprise is buying goods or taking services from an enterprise which has been registered under MSMED Act 2006

Note: Registration of buyer under MSMED Act,2006 is not mandatory. Clause h of Sec 43B(h) is applicable from 01 April 2023

Before discussing further , firstly we should understand the meaning of Micro & Small Enterprises

What are Micro Enterprises?

In order to be registered under MSMED Act,2006 as Micro Enterprise ,enterprise should fulfill all conditions discussed below-

(a) Investment in Plant & Machinery should not exceed 1Crore

(b) Turnover should not exceed 5Crores.

What are Small Enterprises?

In order to be registered under MSMED Act,2006 as Small Enterprise ,enterprise should fulfill all conditions discussed below-

(a) Investment in Plant & Machinery should not exceed 10Crore

(b) Turnover should not exceed 50Crores.

Now, let us understand further about Sec 43B(h)

• Enterprise need to pay to micro & small suppliers within 15 or 45 days
• If payment is not made within above time period , the amount will be added to the taxable income.
• In case, there is no written agreement, payment shall be made within 15 days.
• If there is a written agreement, payment shall be made as per time mentioned in agreement. The agreement can be of maximum 45 days.

Note: Expenses include Purchases as well

IMPACT ON TAXABLE INCOME If payment to Micro & Small Enterprises has not been made in specified time, then that amount shall be added to the taxable income of assessee in Previous Year of Non Payment of such amount & assessee has to bear the tax liability on such amount. The assessee gets deduction  Previous Year in whch payment has been made.

Moreover, According to Noti:RBI/2006-2007/306

If an enterprise not make payment to Micro & Small Enterprises in above specified period, then it has to make payment of compound interest at monthly rests to supplier at 3 times the Bank Interest notified by Reserve Bank Of India.

(It should make payment of interest even if not demanded by Supplier)

WHETHER INTEREST EXPENSE BE ALLOWED U/S 37? U/S 16 this interest expense is in nature of Penal Interest. So interest expense incurred for delayed payment to Micro & Small Enterprises is not allowed u/s 37 of Income Tax Act 1961.

Note: In case any objection was raised in writing within 15 days from the day of the delivery of goods or the rendering of services by the buyer regarding acceptance of goods or services, then the day of acceptance shall be the day on which such objection is removed by the supplier.

Let us understand with help of Practical Example: A has sold goods to B on 01 July 2023 A is a Micro Enterprise B has made payment to A on 01 Feb 2024 As B has made payment to A before 31 March 2024 but after 45 days According to Income Tax Act 1961,We will allow payment in PY 2023-24. But B has to make payment of compound interest at monthly rests  to A at 3 times the Bank Rate notified by RBI even if not demanded by A calculated from due date till date of payment.

Further, this interest expense is disallowed while computing Income under head PGBP.