Dear Reader,
We are reaching out to bring your attention to significant changes in the Income Tax law, specifically in relation to payments made to Micro and Small Enterprises (MSEs). These changes bear substantial importance for your business compliance from FY 2023-24 (AY 2024-25).
The Finance Act of 2023 has introduced amendments to Section 43B of the Income Tax Act (‘The Act’), which have a direct impact on the deductibility of expenses associated with Micro & Small Enterprises. This communication is of utmost significance for businesses that engage with MSEs. This socio-economic welfare measure aims to ensure timely payments to these entities by modifying the deduction provisions outlined in Section 43B.
§ OVERVIEW OF THE AMENDMENT
According to the new clause (h) to Section 43B of the Act, any amount owed by the taxpayer to a micro or small business that is paid after the deadline set forth in Section 15 of the Micro, Small and Medium Enterprises Development (MSME) Act of 2006 will be deductible in the year of actual payment.
In simpler words, any amount owed to the MSEs that was unpaid at the end of the fiscal year and paid in a later year, after the deadline specified by the MSMED Act (whether or not paid before the deadline for submitting the Return of Income for that year) will be recognized as a deduction in that later year rather than the year that the liability is incurred.
Most important part of the amendment is that, only payments to micro and small businesses are considered, medium business owners are not considered for this section.
Traders (wholesale & Retail ) to be excluded
As per section 2(e) of MSMED Act, 2006 – As per the definition of “Enterprise” only production or manufacture of goods are only considered and not trading of goods.
The Ministry of MSME vide Office Memorandum (OM) No. 5/2(2)/2021-E/P & G/Policy dated July 2, 2021 has allowed Udyam registration for retail and wholesale trade. However, benefits to Retail and Wholesale trade MSMEs are restricted to Priority Sector Lending only. Hence, other benefits available under MSMED act are not applicable to traders. Thus, in our opinion, traders may be out of purview of provisions of section 43B(h) of the IT Act.
Section 15 of MSMED Act: Time Limit of payment to MSME Supplier
Section 43B (h) explicitly mandates that payments to Micro and Small enterprises must be made within the timeframe specified in Section 15 of the MSMED Act, 2006. Following this time frame is essential, in order to be claim deduction of the eligible for the amount owed to these micro and small businesses.
Following is a chart for easy understanding of the time limits mentioned in the MSMED Act:
In a nutshell,
- If agreement specifies 20 days, then payment is to be made within 20 days of Invoice.
- If agreement specifies 60 days, then payment is to be made within 45 days of Invoice.
- If no agreement / no Credit limit mentioned in Invoice, then within 15 days of
Repercussions under the Income Tax Act, 1961
In cases where no payment is made towards the invoice within the same financial year, the amount payable to the Micro and Small as per the provisions of Section 43B shall be considered disallowed.
Nonetheless, it is important to note that such disallowed deduction can be claimed in the subsequent fiscal year, upon making the payment. Furthermore, Proviso to Section 43B w.r.t making payments before the date of filing of Return of Income clearly gives an exception to Sub Clause (h).
Furthermore, interest payable under MSMED Act, 2006 is also disallowed under Income Tax Act, 1961.
- FAQ’s
Though there are many grey areas for which clarifications are required from the Income tax department, we have simplified some of the situations.
To help you to understand various complications of the new provisions that have been inserted, we have tried to analyse the same in the form of FAQ’s which would help in understanding the provisions in an easy manner:
1. When will the above amendment of the Income Tax Act come into effect?
It is applicable from Financial Year 23-24 onwards.
2. Which enterprises will fall under the ambit of Section 43B(h) of the Act?
It is applicable only to Micro & Small Enterprises as classified under MSMED Act. Please note – Medium Enterprises are not covered for this purpose.
3. An enterprise is fulfilling the criteria to be classified as a Micro or Small enterprise but is not registered under the MSMED Act 2006. Whether such provisions would be applicable to such enterprises?
Such provisions are applicable only to Micro & Small Enterprises who are registered on the Udyam Portal.
4. Will the provisions of 43B(h) apply to traders registered under the MSMED Act 2006?
Such provisions are applicable only to Micro & Small Enterprises who are registered on the Udyam Portal.
5. Will the provisions of 43B(h) apply to “traders” registered under the MSMED Act 2006? No, traders are not covered under the ambit of such provision. For detailed understanding, kindly refer page 2 of this note.
6. The amount outstanding to an MSE supplier as on March 31, 2024, is paid after due date specified under MSMED Act, 2006 however paid just before the due date of furnishing the return of Income u/s 139(1) of the IT Act. Whether such amount will be allowable as deduction in the tax return of FY 2023-24?
No, such benefit on payment before the due date of filing return of income is not available for taxpayer making payment to Micro & Small enterprise. However, since payment is made in FY 2024 -25, the deduction should be allowed in the said year.
7. Whether any disallowance will be attracted u/s 43B(h) in case the payment is made beyond the time limit, but within the same financial year?
No, there will not be any disallowance since the payment is made in same financial year in which expense is incurred and not outstanding as at the end of the year. The provisions of section 43B applies to those amounts which have remained outstanding at the end of the FY.
8. Below is a scenario in case of a dispute: Purchased & Received goods – 2 March, 2024
Raised a dispute regarding quality of goods – 7 March, 2024 Dispute gets resolved – 30 March, 2024
What would be the due date for payment, assuming there is no agreement in writing?
As per the provision, payment has to be made within 15 days of the acceptance of the goods. However, in the given case, the dispute is raised within 15 days of acceptance of goods. Therefore, in the current case, the payment needs to be made to the MSE supplier by April 13, 2024,
9. Will such provisions be attracted if the buyer is opting presumptive taxation under section 44AD/44ADA of the IT Act?
If the buyer is opting for presumptive taxation, any delayed payment to Micro or Small enterprises will not attract disallowance u/s 43B(h) of the Act.
10. Are delayed payments to MSE for capitalised expenditure covered under such provisions? Since capital expenditure is not claimed by the taxpayer while computing its income under section 28 of the Act, the provisions of section 43B(h) may not be applicable to such capitalized
11. In case of continuous rendering of services, will the service recipient have to make payment within the specified due dates even if the services are going / not completed?
As per provisions of Explanation to Section 2(b) of MSMED Act, the date of acceptance is the date of actual delivery of goods or the date of rendering of services. With regard to rendering of services, the period of actual days agreed / 45 days / 15 days should be considered from the date of completion of service.
However, in case of continuous services being rendered, it may be logical to take a view that 15 days should be considered from the date of completion of service. The buyer must insist MSE supplier to raise the invoice on the day of completion of service to comply with such provisions.
12. What if the supplier has obtained registration under the MSMED Act from mid of the year, would section 43B(h) be attracted?
For this section to apply, registration of suppliers is mandatory. Therefore, in our view, payments made before the registration of the supplier, would not fall under the scope of section 43B disallowance and hence, should be allowed irrespective of the payment terms / date of actual payment.
§ Recommended Steps & Action
- Export list of all Creditors (Goods & Services) from the Accounting
- Send a mail before 10th of February to all Creditors as per Template annexed (Page 7) in this
- Those who have not replied send at least 2 reminders within a gap of 4
- Take a print of Copy of Trail emails of Party who has not replied and File in
- Once, supplier revert regarding their status, update status in sheet and cross verify the status of supplier, its major activity using Udyam Registration Number on the website https://udyamregistration.gov.in/udyam_verify.aspx3
(Note: If Major Activity of Supplier is Trading, it does not lead to disallowance u/s 43B)
- Create a separate Group under Sundry Creditors in your books of accounts for the suppliers who are Micro or Small Enterprise as per MSMED Act. Set the credit period and pass bill to bill entries in the accounting software so that it will be easy to get the related reports for making payment in
- Prepare Ageing Report on 20th March,
- Pay O/s Amount within 25th March, 2024 for Overdue Amount
- If payment is disputed due to quality or rate issues, drop a mail to such creditors
- In case of nonpayment to Micro & Small Enterprise, O/s Amount will be disallowed u/s 43B(h).
- If paid in the next year, it will be allowed in next financial year
ANNEXURE – TEMPLATE FOR SENDING MAIL TO THE CREDITORS
Subject Line of Email: Request for Confirmation for the Applicability of the Micro, Small and Medium Enterprises Development Act.2006.
Dear Sir/Madam,
We request you to confirm whether your organization is a Micro, Small and Medium Enterprises (MSME) under the Micro, Small and Medium Enterprises Development Act, 2006.
If your organization is a MSME under the Act, please specify the category i.e., Micro Enterprise, Small Enterprise or Medium Enterprise under which it is categorized.
Furthermore, please send a copy of your Updated MSME Udyam registration certificate.
Further, if no confirmation is received by us with in that date i.e., within 7 Days, it will deem to be considered that your organization is not registered under the Micro, Small and Medium Enterprises Development Act, 2006.
Also, if you are not registered under the act as on the date of receipt of this communication and if you get yourself registered in future, we request you to keep the company intimated about the same.
Disclaimer:
This alert contains general information existing at the time of its preparation only. It is intended as a news update and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or opinion or services. It is also expressly clarified that this alert is not a solicitation or an invitation of any sort whatsoever or a source of advertising from MARCKS Network. No part of this document may be reproduced in whole or in part in any manner without prior written permission from MARCKS Network..
