Deduction u/s 43B only on Timely payment to MSMEs

[Rajeev Jain]

It is proposed in the Finance Bill 2023 and will go into effect on April 1, 2024, hence will apply to the assessment years 2024-25 and onwards.

It is proposed to include payments made to micro and small businesses within the scope of Section 43B of Income Tax Act, 1961 in order to encourage timely payments to such businesses.

As a result, a new clause (h) is proposed in Section 43B to provide that any sum payable by the assessee to a micro or small enterprise after the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. It is also proposed that the proviso to section 43B not apply to payments to micro and small businesses.

Section 43B

Section 43B provides for certain deductions to be allowed only on actual payment to ensure timely payments to Micro and Small Enterprises.

Proviso to section 43B

Allows accrual-based deduction if the amount is paid by the due date of filing the income tax return.

Section 15 of the MSMED Act 2006

Section 15 of the MSMED Act 2006 requires payments to micro and small businesses to be made within the time specified in the written agreement, which cannot be more than 45 days; if no such written agreement exists, the payment must be made within 15 days.

As a result, the proposed amendment to Section 43B will only allow payments as deductions on a payment basis. However, the deduction can only be allowed on an accrual basis if the payment is made within the time frame specified in Section 15 of the MSMED Act.

Author’s Analysis:

1. This amendment is applicable towards payment made to Micro and Small business, not covered medium business,
2. The meaning of micro, small & medium business are amended in the Atmnirbhar Bharat package on 13th May, 2020 and amendment on 01.06.2020. The definition of Micro manufacturing and services units was increased to Rs. 1 Crore of investment in the plant & machinery and Rs. 5 Crore of turnover. The limit of Small unit was increased to Rs. 10 Crore of investment in plant & machinery and Rs 50 Crore of turnover. Similarly, the limit of Medium unit was increased to Rs. 50 Crore of investment in the plant & machinery and Rs. 250 Crore of turnover.
3. The amount outstanding as on 31^st March towards amount payable and payments has not been made within 45 days or 15 days, as the case may be, shall not be allowed as deduction.
4. Indian markets were notorious in making payment on time and since enterprise were small and micro their voice was unheard by big enterprises and public undertaking this statutory protection will help and maintain cash flows. But we have to hope these points are not used as law for harassment by tax authority as it would be really difficult to explain that we have already complied with such provision.