Three trade bodies have taken their case to the Supreme Court regarding a recent amendment to the Income Tax Act concerning payments to micro and small enterprises. The Federation of All India Vyapar Mandal, the Federation of Madras Merchants and Manufacturers Association, and the Confederation of West Bengal Trade Associations have filed petitions seeking interim stay and ultimately the annulment of the amendment.
These petitions, registered on April 27, are currently awaiting listing. The issue revolves around an amendment that specifies companies failing to make payments to micro and small enterprises within a fiscal year must wait a full year for tax deductions under the IT Act. The amendment came into effect for the assessment year 2024-25, commencing on April 1, 2024.
The Finance Ministry has emphasized that the amendment aims to ensure timely payment to micro and small businesses, but the trade bodies hold a differing view. They argue that the new clause in the Income Tax Act infringes upon the fundamental rights of micro and small enterprises. Furthermore, they contend that the amendment distorts the concept of business expenditure, affecting the allowability of purchases, and disregards the norms established by the RBI for export and import transactions.
Section 15 of the MSMED Act 2006 mandates payments to micro and small enterprises within specified timeframes, and the petitioners assert that delays in payments have been a recurring issue. In response to this, Finance Minister Nirmala Sitharaman announced in the Union Budget for the fiscal year 2023-24 that deductions for expenditures incurred on payments to MSMEs would only be allowed when the payment is actually made.
The explanatory memorandum clarified that these provisions will be applicable to small and medium enterprises meeting specific investment and turnover criteria. Micro-enterprises are defined as units with investments in plant machinery or equipment not exceeding one crore rupees and turnover not exceeding ₹5 crore. For small enterprises, the corresponding figures are ₹10 crore and ₹50 crore, respectively.