Section 43B(H): Why Timely Payments to MSME’s Are Now More Important Than Ever

Introduction

The Finance Act of 2023 introduced Section 43B(H), which outlines that any outstanding amount owed to Micro, Small, and Medium Enterprises (MSMEs) for provided goods or services can be deducted within the same fiscal year if paid by the deadline specified in the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006.

This modification aims to alleviate the challenge of working capital scarcity within the MSME sector and encourage timely payments to micro and small enterprises. Effective from April 1, 2024, this change will cover the assessment year 2024–2025 and subsequent years.

The tax auditor must disclose outstanding payments to micro and small enterprises in Form 3CD of the Tax Audit Report. The assessee should then include this reported disallowance in Form 3CD when calculating total income.

Failure to do so will prompt the income tax department, particularly the Centralised Processing Centre (CPC) in Bengaluru, to add back the disallowance and recalculate tax liability during ITR processing.

Penalties for non compliance

If payments are not made within the specified time limit, not exceeding 45 days, the outstanding amount becomes taxable income for the taxpayer. The taxpayer is then liable for income
tax on the outstanding amount, while deductions are allowed in the previous year when the payment is made.

Additionally, if a business enterprise fails to make payments to Micro, Small, and Medium Enterprises (MSMEs) within the prescribed period, it incurs compound interest charges at a monthly rate of three times the bank interest rate notified by the Reserve Bank of India (RBI), payable to the supplier.

Time Frame

According to Section 15 of the MSMED Act, 2006, business enterprises must settle payments to MSMEs within 45 days, with the timeline contingent upon the existence of a written agreement. If no written agreement exists, payment should be completed within 15 days. However, if there is a written agreement, payment must adhere to the agreed-upon schedule, not surpassing 45 days.

Benefits to MSME’s

Streamlined Payment Cycle: MSME Section 43B(H) encourages large companies or entities to settle dues with MSMEs within a specified timeframe, which is 15 days without a written agreement and 45 days with an agreement.

Enhanced Negotiation Leverage: This provision grants MSMEs stronger bargaining power when negotiating payment terms with larger enterprises or entities.

Decreased Disputes: Timely payments help minimize potential disputes and legal conflicts arising from outstanding dues. This ultimately saves time and resources for both MSMEs and larger businesses.

 

Benefits to Large Companies

Tax Optimization: By adhering to the specified timelines, larger enterprises or companies can avail deductions for payments made to MSMEs within the same fiscal year, leading to decreased tax obligations.

Regulatory Compliance and Transparency: Income-Tax Section 43B(H) fosters transparent financial practices and adherence to regulations, thereby cultivating a responsible business environment.

Strengthening the MSME Ecosystem: Timely payments to MSMEs contribute to the development of a resilient MSME ecosystem, benefiting larger entities by fostering a dynamic supply chain and facilitating access to diverse resources.

 

Exceptions to Section 43 B(H)

Sale of Capital goods: Section 43B(H) of the Income Tax Act, concerning deductions for payments to Micro, Small, and Medium Enterprises (MSMEs), typically excludes transactions involving the sale of capital goods.

Non-registration under the MSMED Act: If the supplier of goods or services is not registered as an MSME under the MSMED Act, Section 43B(H) may not apply. This section specifically
addresses payments owed to MSMEs.

Supplier registered as a Medium Enterprise: Even if the supplier is categorized as a Medium Enterprise under the MSMED Act, it still falls under the MSME category. Consequently, payments to Medium Enterprises are subject to MSMED Act regulations, and deductions under Section 43B(H) would likely be applicable.

Supplier as traders under MSMED Act: If the supplier is registered as a trader under the MSMED Act, deductions under Section 43B(H) might not apply.

Presumptive taxation filing: If the assessee opts for presumptive taxation schemes like Section 44AD (for businesses excluding professions), Section 44ADA (for professionals), or Section 44AE (for transportation businesses), it may affect the applicability of deductions under Section 43B(H).