Section 43B(h) of Income Tax Act: Applicability, Date, Limit, and Implications
Section 43B(h) introduces an essential modification in how payments to MSEs are handled, promoting prompt settlements and supporting the expansion of the MSE sector.
Through this article, we will understand the intricacies of Section 43B(h), exploring its intentions, implications, and the operational steps businesses can take to comply with this important Income Tax regulation.
Table of Contents
Section 43B(h) of Income Tax Act
The Finance Act of 2023 provided a crucial measure with the introduction of Section 43B(h) in the Income Tax Act. This specific part of the legislation has a direct impact on the financial relationship between large businesses and the micro and small enterprises (MSEs) sector. The provision of Section 43B(h) which is newly introduced stipulates that the sums which are due to the MSEs or refundable for the supplies offered or the services provided can be deducted from their income of the same financial year, provided the payments are made within the specified periods under the MSMED Act of 2006.
This clause is very important because it could solve one of the problems of MSEs where there are often delays in receiving payments that often results in shortage of working capital.
Section 43B(h) of Income Tax Act: Applicability and Implications
The applicability and implication of Section 43B(h) are as follows:
Applicability of Section 43B(h)
Section 43B(h) of the Income Tax Act significantly alters the treatment of payments to Micro and Small Enterprises (MSEs). This provision dictates that any amounts due to MSEs for goods or services must be deducted in the same financial year if paid within the timeframe outlined by the MSMED Act, 2006. This legislative change is designed to streamline the payment process and ensure timely settlements between large companies and MSEs, fostering a fairer business environment.
MSME Turnover Limit
Under the MSMED Act, 2006, an enterprise is categorized as micro, small, or medium based on its annual turnover and investment in plant and machinery:
Micro-enterprises: Turnover not exceeding INR 5 Crore.
Small enterprises: Turnover between INR 5 Crore and INR 75 Crore.
Enterprises falling within these limits are eligible for the benefits provided by Section 43B(h) of the Income Tax Act.
Section 43B(h): New MSME 45 Days Payment Rule
Section 43B(h) of the Income Tax Act introduces a vital measure aimed specifically at protecting Micro and Small Enterprises (MSEs) from financial challenges due to delayed payments. This new provision mandates that payments for goods or services provided by MSEs must be settled within 45 days from the date of acceptance. If businesses fail to meet this deadline, they will be at a risk to claim these payments as tax deductions. Provisions under Section 43B(h) are designed to promote prompt payment practices and enhance the financial health of MSEs, contributing to their growth and stability in the economy.
Section 43B(h) of Income Tax Act: Implications for Traders
The provisions of Section 43B(h) applies to traders in the following manner:
Applicability on Traders
The primary goal of Section 43B(h) is to alleviate the cash flow issues that MSEs often face due to delayed payments. By ensuring that payments are made within a set period, the government aims to help these small businesses maintain liquidity, sustain operations, and grow without undue financial strain.
For traders and businesses that deal with MSEs, this rule necessitates a strict adherence to the payment timeline. Compliance is crucial not only for maintaining good business relationships but also for ensuring tax compliance and benefiting from tax deductions.
Effective Date of Applicability
Section 43B(h) is applicable from April 1, 2024. Thus, this amendment is made applicable from A.Y. 2024-2025, that is, F.Y. 2023-2024.
Time Limit
The time limit as per Section 15 of the MSMED Act, 2006 are as below:
Without a Written Agreement: If there is no written contract specifying the payment terms, the buyer must make the payment within 15 days of accepting the goods or services from the MSME.
With a Written Agreement: If there is a written agreement, the payment terms must be honored, but this period cannot exceed 45 days from the date of acceptance or the date of deemed acceptance.
Example of Section 43B(h)
Consider a trader who buys goods worth INR 5 Lakh from a micro-enterprise. According to the MSMED Act, the payment of INR 5 Lakh is to be made within 45 days from the date of the supply. If the trader pays the full amount within this period, they can deduct the entire sum from their income in that financial year, thus reducing their tax liability. This setup is designed to incentivize prompt payments to MSEs, benefiting both traders and micro-enterprises, and supporting a fair and sustainable business ecosystem.
Penalties for Failure to Pay MSMEs Within the Time Frame
Timely payments to Micro, Small and Medium Enterprises (MSMEs) are essential not just for ethical business practices but also due to the legal mandates set by the MSME Development Act of 2006. This act imposes strict penalties for delays in payments to MSMEs, ensuring they do not suffer from working capital issues caused by delayed payments from larger companies. Here is a detailed look at the penalties for failing to pay MSMEs within the stipulated time frame:
Penalties for Late Payment to MSMEs
Rate of Interest: If a payment to an MSME is delayed, the buyer must pay compound interest on the overdue amount at 3 times the bank rate notified by the Reserve Bank of India (RBI).
Applicability of Interest
Date from Agreement: If a specific payment date is stipulated in a contract between the buyer and the MSME, interest liability starts from the day after the agreed payment due date.
Statutory Payment Period: In the absence of an agreed payment date, the interest penalty applies from the day following 15 days from the date of acceptance or the date of deemed acceptance of the goods or services by the buyer.
Deduction of Interest Under Income Tax Act, 1961
Interest paid or payable on overdue amounts to MSMEs cannot be claimed as a business expense for income tax purposes. According to Section 23 of the MSME Development Act, 2006, any interest paid on delayed payments to MSMEs is not deductible from income when calculating taxable income under the Income Tax Act, 1961.
Implications for Businesses
Financial: The obligation to pay compound interest at three times the RBI’s bank rate significantly increases the financial burden on businesses that delay payments to MSMEs.
Tax: The inability to deduct this interest as a business expense further elevates the financial impact, as the effective cost of interest increases after tax considerations.
Operational: Businesses must establish robust processes to handle invoices from MSMEs to avoid these severe penalties. It is advisable to have clear contractual terms and maintain timely payment processes.
Best Practices for Compliance
Contractual Clarity: Clearly specify payment terms in all contracts with MSMEs to avoid any ambiguity about payment deadlines.
Timely Payments: Implement internal processes that prioritize and expedite the approval and payment cycles for MSME invoices.
Regular Audit and Review: Regularly review supplier lists and payment terms to ensure that all MSMEs are identified, and their payments are managed according to statutory guidelines.
Benefits of Section 43B(h) of the Income Tax Act
Following are the benefits of Section 43B(h):
Timely Payments: Ensures prompt payments to MSEs, enhancing their cash flow and financial stability.
Working Capital Management: Helps MSEs manage their working capital more effectively, reducing their need to rely on expensive borrowing options.
Compliance Encouragement: Promotes adherence to the MSMED Act, promoting a culture of legal and ethical business conduct.
Stronger Business Relationships: Aids in building robust business relationships based on trust, reliability, and mutual respect between MSEs and larger enterprises.
How to Check MSME Registration Status
Below steps should be followed to check the status of MSME registration of a business:
Visit the Udyam Registration Portal: Visit the official Udyam Registration portal at https://udyamregistration.gov.in.
Enter Udyam Registration Number: Provide the Udyam Registration number obtained during the registration process.
Submit Verification Details: Provide the verification details required, such as PAN or Aadhaar number associated with the business.
Submit OTP: Complete the verification process by entering the OTP (One-Time Password) sent to the registered mobile number or email address.
View Registration Status: Once verified, the MSME registration status, along with relevant details, will be displayed on the portal.
FAQ
Q1. What is covered under Section 43B(h)?
Section 43B(h) of the Income Tax Act specifically covers any sum payable by the assessee to micro or small enterprises (MSEs). This section ensures that MSEs receive timely payments within the stipulated time as determined by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
Q2. Which enterprises are affected by Section 43B(h)?
Enterprises or businesses dealing with Micro, Small, and Medium Enterprises (MSMEs) are affected by Section 43B(h). Such enterprises must ensure timely payments to the entities under MSMEs to claim deductions under the Income Tax Act.
Q3. What is the timeframe specified under Section 43B(h)?
In case there is an agreement between the large enterprises and MSMEs, payment must be made within 45 days. Where there is no agreement between both parties, payment must be made within 15 days.
Q4. How to ensure compliance under Section 43B(h)?
Enterprises dealing with MSEs must have a proper agreement with MSMEs, adhere to the payment guidelines, ensure necessary documentation is available, and verify MSME registration status.
Q5. Are there any penalties for non-compliance with Section 43B(h)?
Non-compliance under Section 43B(h) leads to addition of such outstanding amounts to the taxable income of the taxpayer. Additionally, interest may be levied on overdue payments as per RBI guidelines.
Q6. Are payments made after the due date allowed to be carried forward for deduction?
No. Payments made after the due date as specified under Section 15 of MSMED Act are allowed as deductions only when it is actually paid.
Q7. Explain the appointed day.
The ‘appointed day’ is the day immediately after the expiry of the period of 15 days from the date of acceptance or deemed acceptance of any goods or services by a buyer from a supplier.
Q8. Is registration on the Udyam portal compulsory?
No. Declaration obtained from the supplier can be considered for recognizing MSMEs.
Q9. How to verify the Udyam registration number provided by the supplier?
The MSME portal must be used to verify the registration and the type of enterprise using the registration number.
Q10. What is the time limit specified for payment under Section 15 of the MSMED Act?
In case of absence of written agreement, payment should be made within 15 days. Where there is no written agreement, payment should be made as per the agreed timeline or maximum within 45 days.
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