H M R R & Associates

4. Section 43B(h) of the Income Tax Act, 1961

Applicability:

Any entity buying goods or taking services from a Micro or Small enterprise registered under the MSMED Act, 2006.

The section is applicable from April 1, 2024 (AY 2024-25) which indirectly shows its applicability to FY 2023-24.

Non-applicability of this section:

If the supplier is not registered under the MSMED Act,
If the supplier is registered under the category of Medium Enterprise,
If the supplier is registered under the category of traders under the MSMED Act,
If the assessee files the Income tax return under presumptive taxation i.e. section 44AD,44ADA, 44AE

Deduction Eligibility:

Any sum payable by an entity to a registered MSME falling under Micro or Small category, beyond the time limit set in Section 15 of the MSMED Act, 2006, is eligible for deduction only in the financial year in which the sum is actually paid.

Clause (h) of Section 43B essentially states that any sum payable by an entity to a registered MSME falling under Micro or Small category, beyond the stipulated deadlines won’t be considered a deductible expense in the year the liability was incurred.

Time Limit for Payment as per Section 15 of the MSMED Act, 2006:

(i) In case there is a written agreement - payment shall be made as per agreed-upon timeline, not exceeding 45 days.

(ii) In the absence of a written agreement - payment should be made within 15 days.

Penalties for Failure to Pay MSMEs Within the Time Frame:

(a) Rate of interest: Compound interest at three times the bank rate notified by the Reserve Bank of India (RBI).

(b) Date from which interest is payable: Appointed day or the date as per the agreement, as the case may be.

Note: Deduction of this interest is not allowed as an expense, as per the Income-Tax Act (ITA), 1961.

Benefits for MSMEs:

• Better Bargaining Power: It is possible for MSME to confidently push for deadlines aligned with the stipulated time frame, as they remain assured of consequences in case of delayed payments.

• Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues, are minimised.

• Compliance and Transparency: Income-Tax Section 43B (h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.