Tag: msme

*Disallowances of expenses due to non-payment to MSMEs [Section 43B(h)]

by Pushkar Mer

Section 43B(h) is introduced by the Finance Act, 2023 and applicable from FY 2023-2024. The Government wants to ensure timely payments to Micro & Small Enterprises. As per MSMED Act, 2006, the definition of MSME enterprises is as under:

*Particulars*                                    *Micro*     *Small*   *Medium*

Turnover                                         <=5 crore <=50 crore <=250 crore

Investment in Plant & Machinery <=1 crore <=10 crore <=50 crore

As per MSMED Act, 2006, *the time limit for making payments* is as under:

(a) Where written agreement does not exist – within 15 days from the date of acceptance

(b) Where written agreement exist – Agreed date or within 45 days from the date of acceptance, whichever is earlier

Section 43B(h) says that if payment is not made to MSME enterprises within the specified time limit, then the expenses will not be allowed as deduction under Income Tax Act and shall be added back to the total income. 

Thus, if the payment is made in subsequent year or payment is made before the due date of income tax return or filing of income tax return in the subsequent year, then the same shall not be allowed as expense in the previous financial year, however the same shall be allowed as expense in the financial year in which the payment has been made.

*Key points of Section 43B(h):*

(a) This Clause is not applicable to Medium category enterprises. It is applicable only on Micro and Small category enterprises.

(b) This Clause is not applicable on Capital expenditure (CAPEX) items, it is applicable on goods & services.

(c) This Clause is not applicable on Traders, it is applicable on manufacturing & services sector

(d) This Clause is not applicable on buyers who are filing their income tax return u/s 44AD/44ADA/44AE of the Income Tax Act;

(e) This Clause is not applicable on those vendors who are not registered under MSMED Act, 2006

(f) This Clause is not applicable on those payables for invoices dated on or before 31/03/2023

Introduction of Section 43B(h) in the Income Tax Act.

by Pushkar Mer

As per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006,the buyer is required to make payment within 45 days of the acceptance of goods or services rendered. If payment not made within 45 days, interest liability arises.

To support MSMEs government seems to be very serious.

The MSME Return form was introduced by the Ministry of Corporate Affairs (MCA) on 22 January 2019 to strengthen the provisions of the MSME Development Act, 2006 (MSMED). In half yearly MEME Return, every company is required to file outstanding details of MSMEs.

Now government has decided to disallow such expenses in case of violation of payment condition as per MSMED Act (means payment must have to be released to MSMEs within 45 days.

The Finance Act, 2023, introduced Section 43B(h) in the Income Tax Act to ensure timely payments are made to MSMEs and to maintain uninterrupted cash flow. This rule will be applicable w.e.f. 1st April, 2024. However, industries is requesting government to postpone this rule for 1 year.

Unlike Section 37(1), the deductibility under Section 43B is not linked to the distinction between capital expenditure and revenue expenditure. Section 43B applies to sums payable in respect of which a deduction is otherwise allowable under this Act.

Therefore, Section 43B(h) would apply to amounts payable to micro or small enterprises with respect to the purchase of capital goods for which a 100% deduction is admissible under Sections 30 to 36. For example, the deduction of 100% of capital expenditure under Section 35AD and the deduction of 100% of capital expenditure on scientific research under Section.

If a 100% deduction of capital expenditure is not allowable, there would be no disallowance with respect to depreciation on capital goods purchased if the MSE supplier of capital goods is not paid in time. This is because depreciation is not a “sum payable in respect of which deduction is otherwise allowable”. What can be disallowed under Section 43B(h) must have the character of a sum payable in respect of which deduction is otherwise allowable.

The Courts had taken the view that depreciation cannot be disallowed on the cost of the asset which was capitalized in books of account, but tax thereon was not deducted under Section 40(a)(i)/(ia) of the Act.