Analysis of New Clause (H) of Section 43B
The Finance bill 2023 would include a new insertion of clause (h) to section 43B of the income tax act 1961. To assure on-time payments, the stated clause would have been inserted as a Socio-Economic Welfare Measure and has been realized through the Micro and small companies. Section 43B of the Act furnishes for specific deductions to get permitted on the real payments. To this section, the Finance bill 2023 would have newly inserted the clause which would be stated as under-
Section 43B (h): “any sum payable by the assessee to a MICRO or SMALL enterprise beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006,”
The mentioned above clause shows that the payment will need to be made under the specified time duration in 15 of the Micro, Small, and Medium Enterprises Development Act, 2006 for qualifying the claim deduction of the sum liable to get paid to the micro and small enterprises.
Deadline Specified in Section 15 of the Micro, Small, and Medium Enterprises Act
Section 15 of the MSME Development Act, 2006 defines that
“Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement on this behalf, before the appointed day*:
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall not exceed forty-five days from the day of acceptance or the day of deemed acceptance”
It is understood from the aforementioned discussion, as agreed between the buyer and supplier the payment shall get made by the buyer, but it could not be more than 45 days from the acceptance date or the day of the deemed acceptance i.e from the acceptance day of the goods or service.
*‘Appointed day’ means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.”
Failure to Pay MSMEs within the Timeframe Specified in Section 15 Resulting in Negative Outcomes
The buyer who is not able to perform the payment to the supplier of goods or services as a company enrolled as a micro or small enterprise, will get smashed through the new insertion of Finance bill 2023 vide clause (h) of Section 43B moreover to the compensatory interest liability as levied through the section 16 of MSME Development Act, 2006 and is indeed an ineligible business expense. The outcomes shall be-
- (i) Compensatory of the Interest: In which any purchaser would unable to perform the payment of the amount to the supplier as needed under section 15, in any agreement made between the buyer and the supplier or in any regulation for said time the buyer will notwithstanding anything specified in it is responsible to file the compound interest with the monthly rests on that amount from the appointed day to the supplier or according to the case from the date immediately following the date agreed on, at 3 times of the rate of the bank circulated through the Reserve Bank. RBI notified bank rate for the same subject is the RBI repo rate as on.
- (ii) Prohibition of Interest Payments Made as Compensation to MSMEs: the interest payable amount or paid through any buyer under the provision of Section 23 of MSME Development Act, 2006, will not be for the purposes of the calculation of the income under the income tax act 1961 permitted as a deduction.
- (iii) Expenditure Disallowance: For the expenses made any sum liable to be paid by the taxpayer or the payment for the purchases to the supplier enrolled as a micro or small enterprise will not be authorized when it does not pay in the specified time duration in 15 of the MSME Development Act, 2006, cited above.
Which Communities are Included Under Clause (h) of Section 43B, and What is the Procedure for Their Identification?
Merely for the sum payable to the Micro & Small Enterprises, the clause would be subjected to be applied. Hence on an accrual basis, the sum liable to be paid to the Medium Enterprise is qualified for deduction.
Meaning of Enterprise as Per MSME Development Act, 2006
A business concern or an industrial undertaking or any other establishment through any name it called termed an enterprise, is involved in the manufacture or production of goods, related to any industry established in the First Schedule to the Industries (Development and Regulation) Act, 1951 or has the operation in providing or the rendering of any service or services.
Type of Enterprises as Per MSME Development Act, 2006
The power is allotted to the Central Government to categorize any class or classes of enterprises, a proprietorship, a Hindu undivided family, an association of persons, a cooperative society, a partnership firm, a company or undertaking, or any other lawful entity as a micro, small or medium enterprise. section 11B of the Industries (Development and Regulation) Act, 1951 is been overridden by this section.
The enterprise category as Micro, Small & Medium as described in the Micro, Small and Medium Enterprises Development Act, 2006 is made for your reference:
Micro Enterprise
- Investments less than Rs. 1 crore
- Turnover of less than Rs. 5 crore
Small Enterprise
- Investments less than Rs. 10 crore
- Turnover less than Rs. 50 crore
Medium Enterprise
- Investments less than Rs. 20 crore
- Turnover less than Rs. 100 crore
From the respective supplier, it is suggested to the business entities to take the annual declaration that shows they are counted under micro or small enterprises registered beneath the Micro, Small and Medium Enterprises Development Act, 2006 which shall ensure due compliance and ease the purchaser to find out the enterprise. It is recommended to Micro and small enterprises specify a note on the invoice given through them which shows that they are enrolled under the micro or small enterprise under the MSME Development Act, 2006, for easing the purchaser towards the need for compliance
Effective Date of New Clause (h) U/S 43B
From 1st April 2024, the applicability of clause (h) of Section 43B will be the effective date.
It stated, due to any outstanding sum liable to be paid to the micro and small enterprises because on the end day of the FY 2023-24 and onwards left unpaid sum after the given time duration in 15 of the Micro, Small and Medium Enterprises Development Act, 2006 does not permit and would add back to the income as calculated under section 28 of the Income Tax Act, 1961 from 1st April 2024.
Is IT Section 43B(h) Boon or Bane for the MSME Sector?
On the newly introduced clause (h) of section 43B of the Income Tax Act 1961 much debate is going on, which comes into effect from the AY 2023-24 onwards on the permission of the expenses either for buying goods or taking services on and from 01.04.2023 from the Micro and Small Enterprises as defined in the MSME Act 2006, which is an industrial undertaking or a business circumstance or any other establishment, by whatever name called, involved in the manufacture or production of goods, in any case, related to any industry set in the First Schedule to the Industries (Development and Regulation) Act, 1951 or committed in furnishing or rendering any service or services.
To claim the deduction, the payment must be incurred within 15 days or if there is a written agreement between the buyer and seller within 45 days and not beyond that (even if they have an agreement) from the day of supply of goods or services or acceptance of the same whichever is later, as defined in section 15 of the MSMED Act 2006.
The small enterprise should secure an investment in plant & machinery not exceeding 1 Crores and turnover not more than 5 Crores and the medium enterprise must have an investment in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores. An enterprise that is committed to trading is not covered by the term “enterprise” and therefore it could not claim for the benefit.
For claiming the deduction the payment must be done in 15 or 45 days as per the matter however according to the section the deduction shall be permitted despite when it is paid beyond the stated days when they are getting paid within the year or in the payment year furnished that they are filed with the compounded interest with the monthly rests three times of the bank as per the norms of RBI.
Rate of Interest Functions
The rate of interest functions out to be a whopping 19.5%, which appears to be unreasonable since the current RBLR is 6.5%. The same interest shall not be permissible expenditure as the same is penal in nature. Can they abstain the interest is another question.
For the purchasers, it looks to apply to all the taxpayers whatever the business activity since the same could not be limited to the manufacturers or industries only. Also, it applies to professionals who purchase goods or obtain supplies via MSMEs.
In securing the MSME’s interests the government’s intention is justifiable, the same provision must not influence the genuine business transactions. The quality or the nature of the goods or services determines the product value or service also it relies on the demand and the supply for the same. From the present business information, various big business houses are initiated to return or reject the goods to prevent the complications that shall affect the MSMEs to a great extent which is a Bane for the MSMEs.
Reporting that in the audit reports post finding that if the enterprise is qualified for the advantages and then disallowing that in 1 year and permitting that in another year to find out that if the interest is computed effectively and filed to disallow the interest part to surge the load of work on the auditors to a great extent. For taxpayers who are not subjected to the audit, need to disallow the expenditure as mentioned in the act.
What About the Udyam Registration?
A firm of Chartered Accountants, who have got Udyam Registration, can claim the advantages of section 43B(h) and the clients including Banks and Government enterprises could not maintain the bill due for exceeding 15 days, which is ‘Boon’ for the firm of Chartered Accountants; this advantage might not be available for members practising individually as they might not be able to get Udyam Registration.
Post obtaining the inputs from all stakeholders viz. MSMEs., Big Business houses, Manufacturers, Chartered Accountants, Advocates, and Tax Practitioners the Government needs to verify the issue to prevent additional difficulties and litigations.
Closure: A significant compliance challenge for businesses is been presented by Section 43B(h) of the Income Tax Act, 1961. With an understanding of the provision and a bold approach to handling vendor payments, businesses can navigate these essentials effectively.
The provision, controversial, highlights the significance of assisting the MSME sector. As the government’s subsequent clarifications arise, companies must be updated and adaptable to information to stay compliant and promote approving vendor relationships.
FAQ on Section 43B(h) of I-T 1961
Section 43B(h) of the Income Tax Act, 1961 enactment shifted considerable debate in the business community in India. It is evident with distinct protests and calls for its deferment or repeal, that confusion and problem saturate among business owners and trade associations alike.
Through a complete analysis of frequently asked questions (FAQs), the article seeks to specify Section 43B(h) furnishing in-depth information and possible solutions to the common queries asked among the business sector and the general public.
Q.1 – What is Section 43B(h)?
Concerning the timelines of the payments to the vendors, particularly those enrolled under the MSME act, Section 43B(h) charges conditions on businesses. This provision has the motive to confirm the prompt payment before the MSMEs hence rectifying the flow of cash and diminishing the financial stress. However, its perceived unfairness has directed widespread dissent emphasizing the requirement for thorough understanding.
Q.2 – How to Navigate Tax Compliance U/S 43B(h)?
Complying with Section 43B(h) requires businesses to adjust their processes pertinent to payment and ensure they have the essential documentation and systems secured to validate the MSME registration status and track payment deadlines in a precise way. Awareness and knowledge of such essentials are fundamental to guiding compliance effectively.
Q.3 – In what way does the buyer know whether the supplier is registered under the MSME Act or not?
The buyer is required to receive a written declaration from the supplier concerning their registration status under the MSME Act. Alternatively, the buyer can get the MSME registration number from the supplier and check their status at https://udyamregistration.gov.in/udyam_verify.aspx The buyer is required to confirm that he is enrolled as a Manufacturer merely and not as a “Trader” as the latter is not covered under it.
Q.4 – Are the balances that are due as of 31.3.2023 also covered and liable to be paid?
No, only the balances which are due as of 31.3.2024 and which are due for exceeding 45 days (in case of a written agreement, otherwise 15 days) are covered.
Q.5 – At the time of the Financial year, the buyer purchased the goods dated 01.07.2024 and settled the MSME creditor on 31.3.2025, then will it be disallowed?
No, the sum obligated to be paid is to be seen. The harsh provision of the MSME act shall be applicable and interest will liable to be paid on the outstanding balance via the buyer on the late payment (principal amount) at a rate 3 times the bank rate, as specified by RBI, compounded with monthly rest. 5.15% is the current bank rate so the thrice of it comes at 15.45%.
Q.6 – From what date is the period of 15/45 days to be computed?
The acceptance date of these goods or services to be deemed i.e. the delivery date of the goods. THE INVOICE DATE IS COMPLETELY IRRELEVANT here. Therefore, when the goods remain with the transport for exceeding 45 days, also the same provision is not applicable, and be applicable only upon the receipt of such goods/ services.
Q.7 – Whether the interest authorized as an expense and be debited to the Profit and Loss Account?
No, the interest is not permitted to be debited. Section 23 of the MSME Act does not permit interest expense for the Income Tax Act, of 1961.
Q.8 – Whether the provision of Section 43B(h) applicable to the purchase of capital goods from an MSME Supplier?
No, the expenses which are permitted in the Profit and Loss Account could merely be disallowed. The purchase of capital goods is not an expense, so there comes no question of its disallowance.
Q.9 – Whether the complete invoice amount to be disallowed or just the purchases’ part?
Disallowing the purchase part only if the GST on it is mentioned as an obligation otherwise the entire amount.
Q.10 – I have filed the amount due as dated 31.3.2024 on 10.04.2024, which is before the last date of filing the ITR, will it be permitted then?
No, the proviso is very much evident and does not have clause (h) from its purview. Thus, the amount shall not be permitted and be disallowed also if it’s being paid before the last date.
Q.11 – If I am showing income under section 44AD/ADA, then will the provision be appropriate?
No, the provisions of section 43B(h) shall not be subject to be applied to section 44AD/ADA as it starts with “Notwithstanding anything to the contrary contained in sections 28 to 43C” and section 43B(h) comes between it.
Q.12 – Do I require to pay every creditor in 15/45 days?
No, merely the suppliers who are enrolled as Micro or Small enterprises are covered.
