MSME NEW RULE INCOME TAX
MSMEs INCOME TAX NEW RULE 43B Mandates

Introduction to Clause (h) of Sec. 43B: Inserted vide Finance Act, 2023 w.e.f. 01.04.2023, clause (h) of Sec. 43B mandates that any sum payable to a registered MSME being a micro or a small enterprise before the due date as per Sec. 15 of the MSMED Act, 2006. Violation of the provision would invite disallowance of the expenditure from computing total income and deduction shall be subsequently allowed only after actual payment has been made.

Reason for Conjecture?

MSME entities constitute a large segment of the Indian economy and almost all assesses are dealing with MSME entities throughout the year. Hence, the new provision is likely to impact a wide scale of taxpayers by making them factor the impact of their payments released to these MSME entities. With the current year 2023-24 ending shortly, assessees are being forced to revisit their creditor list and chalk out a payment plan to avoid the rigors envisaged u/s 43B(h).

FAQ 1: What types of payments are covered under the newly inserted clause (h) in Section 43B?

The newly inserted clause (h) in Section 43B specifically covers any sum payable by the assessee to a “micro” or “small” enterprise. This amendment is aimed at ensuring timely payments to these enterprises, aligning with the stipulations of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Payments that go beyond the specified time limit under Section 15 of the MSMED Act are covered under this clause and are allowed as deductions only upon “actual payment.

FAQ 2: Who are ‘micro’ and ‘small’ enterprises as per the MSME Act, 2006 as per revised definition?• Micro Enterprises: Enterprises with an investment in plant and machinery or equipment not exceeding INR 1 crore and turnover not exceeding INR 5 crore.• Small Enterprises: Enterprises with an investment in plant and machinery or equipment not exceeding INR 10 crore and turnover not exceeding INR 50 crore.

FAQ 3: What is the meaning of ‘investment’ in plant and machinery for the purpose of understanding a ‘micro’ and ‘small’ enterprise?

As per RBI/2020-2021/26 – FIDD.MSME & NFS.BC.No.4/06.02.31/2020-21 dated 21 August 2020, the online form for Udyam Registration captures depreciated cost as on 31st March each year of the relevant previous year. Therefore, the value of Plant and Machinery or Equipment for all purposes of the Notification No. S.O. 2119(E) dated June 26, 2020 and for all the enterprises shall mean the Written Down Value (WDV) as at the end of the Financial Year as defined in the Income Tax Act and not cost of acquisition or original price, which was applicable in the context of the earlier classification criteria.

FAQ 4: How does the amendment affect deductions for payments made to micro and small enterprises on an accrual basis?

The amendment stipulates that payments to micro and small enterprises, which are delayed beyond the time limits specified in Section 15 of the MSMED Act, can no longer be claimed as deductions on an accrual basis. Certain deductions under Section 43B could be claimed on an accrual basis if the payment was made by the due date of furnishing the return of income. However, with the proposed amendment, such payments will only be allowed as deductions upon actual payment, and the proviso to Section 43B allowing accrual basis deductions does not apply to these payments.

FAQ 5: What is the time limit for making payments to micro and small enterprises as per the MSMED Act, beyond which deductions will only be allowed on actual payment?

As per Section 15 of the MSMED Act, payments to micro and small enterprises must be made within the time specified in the written agreement, which cannot exceed 45 days. If there is no written agreement, the payments must be made within 15 days. Any payments made beyond these time limits are subject to the conditions of the newly inserted clause (h) in Section 43B, where deductions are allowed only on actual payment.

FAQ 6: What if the payment terms agreed between the parties exceed 45 days (say, 60 days?)

In terms of Sec. 15 of the MSMED Act, payment terms cannot exceed 45 days. Hence, in a scenario where the payment terms have been set beyond 45 days (say, 60 days), then it shall be restricted to 45 days and due date shall be ascertained accordingly.

FAQ 7: How does this amendment impact the filing of income tax returns for businesses dealing with micro and small enterprises?

Businesses that deal with micro and small enterprises will need to be more diligent in tracking and ensuring timely payments to these entities. Since deductions for delayed payments to micro and small enterprises can only be claimed upon actual payment, businesses may need to adjust their accounting and tax planning practices. This includes potentially revising their cash flow management to accommodate timely payments or facing the tax implications of delayed payments. The amendment reinforces the importance of adhering to the payment timelines specified under the MSMED Act to avail of tax deductions efficiently.

Further, it may be pointed out that the tax auditor shall be required to report unpaid dues to ‘micro’ and ‘small’ enterprises in Form 3CD of the Tax Audit Report. The assessee shall be required to add back to its total income, the disallowance reported in Form 3CD of its Tax Audit Report and accordingly file its ITR failing which Income Tax Department via CPC, Bengaluru shall add back the disallowance and recompute tax liability while processing the ITR.

FAQ 8: Whether ‘traders’ are covered for the purpose of benefit of delayed payments?

As per O.M. 5/2(2)/2021-E/P & G/Policy dated 02-07-2021, wholesale and retail trader are entitled for Udyam registration only for the benefit of Priority Sector Lending only. So, purchases from traders would be outside the purview of these amendments. Hence, any sum payable to a creditor, being a trader, shall not attract the rigors of Sec. 43B(h).

FAQ 9: What nature of payments is included in this provision?

The above provisions are applicable to ‘any sum payable’ i.e. covering revenue expenditure along with capital expenditure. The implications would arise as follows:• In case where the assessee is claiming the deduction as revenue expenditure, disallowance u/s 43B(h) is attracted for payment beyond the stipulated date.• In case where the assessee is capitalizing the expenditure, then claim for depreciation u/s 32 shall be restricted till the time payment is made to the seller in view of overriding effect of Sec. 43B over Sec. 32 of the Income Tax Act.

FAQ 10: Whether full payment needs to be made or, even a part payment shall qualify for deduction on payment basis?

Since the mandate of Sec. 43B of the Income Tax Act, 1961, provides for deduction on actual payment basis, hence, even if a ‘micro’ and/or ‘small’ enterprise has been paid in part, then deduction to the extent of such part payment shall be allowed.

FAQ 11: Can the terms of payment mentioned in the invoice itself can be considered as written agreement?

The term “written agreement” is not specified in the Act. An agreement means “an offer made by one person and accepted by another must be accepted by all parties involved” and therefore, even an invoice can be considered as written agreement as it contains all the characteristics of agreement.

FAQ 12: Whether unpaid GST component pertaining to an invoice issued by a ‘micro’ and/or ‘small’ enterprise qualify as a disallowance for the purpose of Sec. 43B(h)?

The recipient is entitled to claim input tax credit, subject to conditions as per the GST Act, on supplies procured by them. The component of such input tax credit is not an item claimed as an expenditure in its P & L account since it is an asset which can be set off against its GST liability. Thus, where the GST component represented by way of input tax credit was not claimed as an expenditure in the first place, hence, no question of disallowance arises for an unpaid GST amount.

However, where the recipient does not claim input tax credit under GST and treats the same an expenditure from its P & L account, hence, deduction against the same shall be allowed only on payment basis.

FAQ 13: Whether an ‘account payee’ issued in favour of the seller at a date before the stipulated date but cleared afterwards qualify for the purpose of deduction?

In such a scenario, it would be essential to examine:(i) Date of acceptance of the instrument by the micro and small enterprise, and(ii) The date on which the debit entry takes place in the buyer’s account.

If the seller accepts that the instrument was handed over at an earlier date but could not be deposited in his account within the stipulated date, then it may suggest that the payment was made within the due date and no disallowance u/s 43B(h) be required.

FAQ 14: What if the recipient buyer opts to declare its income as per Section 44AD / 44ADA / 44AE of the Income Tax Act?

The above provisions are not applicable if the recipient buyer is declaring profits under presumptive scheme u/s 44AD / 44ADA / 44AE of the Act as it is specifically mentioned in the section that “notwithstanding anything contrary contained in section 28 to section 43C” of the Act.

FAQ 15: Is this amendment applicable to transactions on or after 01/04/2023 or is it applicable for old outstanding invoices pertaining to F.Y. 2022-23 also?

This amendment applies only to any expenditure incurred on or after 01/04/2023. Hence, invoices issued on or after 01/04/2023 shall be taken into consideration.

FAQ 16: How can a ‘micro’ and ‘small’ enterprise avail maximum benefit as per the newly inserted clause (h) of Sec. 43B?

The enterprise may consider the following steps –• Obtain a valid MSME UDYAM registration.• Quote its registration number on all invoices and mention its status as ‘micro’ / ‘small’ enterprise, as may be applicable.• Specify payment terms such as ‘Payment within 3/5/10 days from presentation of invoice/completion of service/delivery of goods’ on the invoice.• Send a letter to its customer as per format attached if the payment is not received within the stipulated date.

Enclosures:(1) Illustrative Scenarios Capturing Allowability as per Sec. 43B(h)(2) Draft Letter for Customers

Illustrative Scenarios on Sec. 43B(h) of the Income Tax Act, 1961

Sr. No.Date of InvoicePayment terms as per AgreementDue Date as per MSME ActActual payment dateDeduction allowed in FY
1.01/03/2024No Agreement15/03/202410/03/20242023-24
2.01/03/2024No Agreement15/03/202420/03/20242023-24
3.01/03/2024No Agreement15/03/202410/04/20242024-25
4.20/03/2024No Agreement03/04/202402/04/20242023-24
5.20/03/2024No Agreement03/04/202412/04/20242024-25
6.01/03/20247 days 07/03/202407/03/202405/03/20242023-24
7.01/03/20247 days 07/03/202407/03/202415/03/20242023-24
8.01/03/20247 days 07/03/202407/03/202402/04/20242024-25
9.28/03/20247 days 03/04/202403/04/202402/04/20242023-24
10.28/03/20247 days 03/04/202403/04/202412/04/20242024-25
11.01/03/202415 days 15/03/202415/03/202410/03/20242023-24
12.01/03/202415 days 15/03/202415/03/202420/03/20242023-24
13.01/03/202415 days 15/03/202415/03/202410/04/20242024-25
14.20/03/202415 days 03/04/202403/04/202402/04/20242023-24
15.20/03/202415 days 03/04/202403/04/202412/04/20242024-25
16.01/03/202430 days 30/03/202430/03/202410/03/20242023-24
17.01/03/202430 days 30/03/202430/03/202431/03/20242023-24
18.01/03/202430 days 30/03/202430/03/202410/04/20242024-25
19.20/03/202430 days 18/04/202418/04/202402/04/20242023-24
20.20/03/202430 days 18/04/202418/04/202422/04/20242024-25
21.14/02/202445 days 29/03/202429/03/202410/03/20242023-24
22.14/02/202445 days 29/03/202429/03/202431/03/20242023-24
23.14/02/202445 days 29/03/202429/03/202410/04/20242024-25
24.20/02/202445 days 04/04/202404/04/202402/04/20242023-24
25.20/02/202445 days 04/04/202404/04/202412/04/20242024-25
26.14/02/202460 days 13/04/202445 days 29/03/202410/03/20242023-24
27.14/02/202460 days 13/04/202445 days 29/03/202431/03/20242023-24
28.14/02/202460 days 13/04/202445 days 29/03/202410/04/20242024-25
29.20/02/202460 days 19/04/202445 days 04/04/202402/04/20242023-24
30.20/02/202460 days 19/04/202445 days 04/04/202412/04/20242024-25

Standard letter that may be sent to customer/client to expedite the overdues under the scheme

Date: ___________

To,

Client Name: _______________

PAN: _______________

GST: _______________

Address: _______________

Sub: Intimation of MSME Udyam Registration

1.0 We confirm that the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 are applicable to us and our Udyam Registration No. is __________________ (copy of Udyam Registration Certificate enclosed).
2.0 Our entity falls under the following enterprises as per the provisions of the Micro, Small and Medium Enterprises Development Act, 2006:
 (a)Micro Enterprise[     ]
  
 (b)Small Enterprise[     ]
3.0 We further confirm that the credit period agreed under the Micro, Small and Medium Enterprises Development Act, 2006 between the above-mentioned entity and us is _______ days.
4.0 As on the present date, your dues as appearing our books is as per the ledger attached.
5.0 It is advised that our dues be cleared promptly to avoid disallowance u/s 43B(h) of the Income Tax Act, 1961 without prejudice to other consequences attached as per the MSMED Act, 2006, CGST Act, 2017 and other laws prevailing in India.

Thanking you,

Yours faithfully,

For __________________

_____________________

[Authorized Person Name]

Encl: Ledger as on date

Shivank Chhaparia FCA