In today’s dynamic business landscape, MSMEs play a crucial role in driving economic growth. However, we understand that navigating the challenges and seizing opportunities can be daunting. In a bid to streamline compliance with the MSME Development Act (MSMED) 2006, a new Clause (h) has been introduced to Section 43B. Effective from Assessment Year 2024-25 onwards, this amendment disallows the deduction of overdue payments to Micro or Small Enterprises (as per MSMED Act) beyond specified limits (15 days/45 days). However, deductions will be allowed in the year the payment is actually made.
To shed light on this matter more, let’s delve into some key questions and answers:
Question : Which enterprises are know as MSME?
Answer : The definition of MSME is as follows:
| Micro enterprises | Investment in Plant and Machinery or Equipment does not exceed 1 crore rupees and turnover does not exceed 5 crore rupees; |
| Small enterprises | Investment in Plant and Machinery or Equipment does not exceed 10 crore rupees and turnover does not exceed 50 crore rupees; |
| Medium enterprises | Investment in Plant and Machinery or Equipment does not exceed 50 crore rupees and turnover does not exceed 250 crore rupees |
Question : What changes or amendment is made regarding payment to creditors?
Answer: This new rule is applicable from AY 2024-25 and onwards which states that if an assessee makes payment to micro or small enterprises beyond the limit specified (15 days/45 days), then deduction of such payment will not be allowed in the previous year in which payment is due. It will be allowed in the previous year in which payment is actually made.
Read Also: Everything You Need to Know About Registering an MSME Online.
Question : Who all have to comply with this new compliance of section 43(h)?
Answer : All taxpayers need to comply with Section 43B(h) from FY 23-24, there is no exception. It is applicable on expenses whose payment is not made within the specified period and incurred from a vendor who :
- is a Micro Enterprise or Small Enterprise as per MSMED Act, 2006, and
- is either a manufacturer or a service provider or both, and
- is registered on UDYAM portal
Question : When is this clause not applicable?
Answer : If payment is made within a specified period or if the vendor is not registered on UDYAM or if the vendor is a Medium Enterprise as per MSMED Act or if vendor is a trader (retailer/wholesaler), then deduction shall be allowed normally irrespective of date of payment.
Question: Whether all suppliers are covered under MSME?
Answer: No, only the suppliers engaged in the manufacture or production of goods or engaged in providing or rendering of any service or services. Therefore, this rule is not applicable for dues outstanding to traders or wholesalers.
Read Also: Income Tax on Startup – Tax Rates, eligibility and prerequisites
Question : If a supplier is engaged in both i.e. trading as well as manufacturing/services, in that situation whether section 43B(h) is applicable for dues outstanding to that supplier?
Answer : In such a situation, section 43B(h) can be made applicable for dues outstanding to such suppliers.
Question : How to be compliant with this new change?
Answer : It is suggested to obtain written declarations from all vendors whether they are registered on the UDYAM portal or not. Preferably, keep a copy of the MSME certificate in the records as well. Through MSME Portal, one can verify MSME registration and the type of enterprise (Micro/ Small/ Medium) using the registration number. It is the responsibility of the supplier to intimate its registration to the buyer. If in any case, the supplier has not in any manner intimated his MSME registration, then in absence of availability of information, no disallowance can be made under section 43B(h).
Read Also: Income Tax: Importance of ITR for availing Business Loan
Question : Whether this clause applies to all expenditures?
Answer : Since section 43B relates to revenue expenditure only, if there is any outstanding payment against capital expenditure such as purchase of fixed assets, then there will be no disallowance under 43B(h).
Question : Whether expense is allowed when payment is made before filing of ITR?
Answer : In this cases, payment made before the ITR due date or not, is not relevant for 43B(h).
Read Also: MSME Loan- Eligibility criteria, Process, Interest Procedure, Last date
Question : What is the Specified period under MSMED Act, 2006?
Answer : Specified period is the Time limit of payment under Section 15 of MSMED Act, 2006 which is as follows:
| Credit period agreed | Disputes regarding acceptance of goods or services | Time limit |
| Up to 45 days | No Dispute | Actual Credit period starting from the date of delivery of goods or rendering of services |
| Disputed but objection not raised in writing within 15 days from the date of delivery of goods or rendering of services | ||
| Disputed and objection raised in writing within 15 days from the date of delivery of goods or rendering of services | Actual Credit period starting from date of removal of objection by supplier | |
| More than 45 days | No Dispute | 45 days from the date of delivery of goods or rendering of services |
| Disputed but objection not raised in writing within 15 days from the date of delivery of goods or rendering of services | ||
| Disputed and objection raised in writing within 15 days from the date of delivery of goods or rendering of services | 45 days from the date of removal of objection by the supplier | |
| No credit period agreed in writing between taxpayer & vendor | No Dispute | 15 days from the date of delivery of goods or rendering of services |
| Disputed but objection not raised in writing within 15 days from the date of delivery of goods or rendering of services | ||
| Disputed and objection raised in writing within 15 days from the date of delivery of goods or rendering of services | 15 days from the date of removal of objection by the supplier |
Hope this will be helpful for you not only for now but for quick reference in future. And Don,t forget to pay MSME on Time.
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