1 |
Introduction |
The Finance Act, 2023, introduces changes with the insertion of clause h in section 43B of the Income Tax Act, enhancing MSME payment regulations. This analysis explores its implications for small businesses, focusing on the Income Tax Act, 1961, and the MSMED Act, 2006. Section 43B(h) disallows expenses for payments not made within specified time limits, bolstering enforcement for MSME payments. Definitions of MSMEs and payment periods are discussed. |
2 |
Definition of MSMEs |
MSMEs are classified based on investment in plant/machinery and turnover. Micro: ≤₹1 crore investment, ≤₹5 crore turnover; Small: ≤₹10 crore investment, ≤₹50 crore turnover; Medium: ≤₹50 crore investment, ≤₹250 crore turnover. This classification came into effect from July 1, 2020. |
3 |
Payment period |
Buyers must pay suppliers within agreed-upon timeframes or within 45 days if no agreement exists. Interest is payable at 3 times the bank rate if payment is delayed. Buyers subject to audit must furnish dues to MSMEs. Interest paid or payable is not allowed as expenditure under Section 23 of the MSMED Act, 2006. |
4 |
Disallowance under 43B(h) |
Expenses unpaid beyond specified time limits are disallowed under section 43B(h) of the Income Tax Act. Interest is applicable on delayed payments. Disallowance and interest are not allowed as expenditure. |
5 |
Traders under Section 43B(h) |
Only manufacturers and service providers are covered by Section 43B(h) of the Income Tax Act. Retail and wholesale trades are included as MSMEs but with restricted benefits. |
6 |
Disallowance under 40(a)(ia) |
If TDS is not deducted and payment is not made within time limits, disallowance occurs under section 43B(h) rather than 40(a)(ia). This is because no deduction is claimed. |
7 |
Applicability under Section 44AD |
Section 43B(h) does not apply to businesses filing returns under Section 44AD or 44ADA, as these sections override Sections 28 to 43C. |
8 |
Applicability under No Tax Audit |
Section 43B(h) is applicable regardless of turnover, affecting income computation. |
9 |
Application to Micro/Small Ent |
Micro and small enterprises must comply with payment conditions even when purchasing from other MSMEs. |
10 |
Recommendations |
Collect MSME certificates from vendors, maintain a list of certified vendors, issue agreements or purchase orders with payment terms, ensure timely payments, and mention MSME Udyog Aadhar number on invoices. |
11 |
Conclusion |
The integration of section 43B(h) of the Income Tax Act and the MSMED Act, 2006, establishes strict MSME payment regulations. Businesses must adhere to payment periods and interest provisions to ensure compliance. This analysis serves as a guide for businesses to understand and implement these regulations, securing their financial practices and relationships with MSME vendors. |