Section 43B(h) Amendment in MSME with Example
The Finance Act, 2023 Introduced a New Clause (h) in Section 43 of the Income Tax Act, 1961, which affects the tax deductions available to business that deal with Micro, Small and Medium Enterprises (MSMEs). This article will explain the applicability, Scope and implications of this amendment with an example
What is section 43B of the Income Tax Act?
Section 43B of the Income Tax Act is a provision that specifies certain deductions that can be claimed by businesses only a actual payment basis, irrespective of the accounting method followed by them. This means that such deductions are allowed only in the year in which the payment is made, and not in the year in which the liability is incurred.
Some of the deductions covered under section 43B are:
- Any Tax, duty, cess or fee paid to the government
- Any sum payable by the employer as contribution to provident fund or other welfare funds
- Any Interest payable on any loan or borrowing from any public financial institution or bank
- Any sum payable as bonus or commission to employees
- Any sum payable as royalty, technical fees or any other fees for professional services
What is the new clause (h) of Section 43B ?
The Finance Act 2023 inserted a new clause (h) in section 43B, which states that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, shall be allowed only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.
This Means that if a business owes any amount to a micro or small enterprise of goods supplied or services rendered, and does not pay it within the stipulated time limit under the MSMED Act, 2006, then such amount will not be deductible as on expense in the year of accrual, but only in the year of payment.
This Amendment aims to address the issue of working capital scarcity in the MSME sector and encourage timely payments to micro and small enterprises.
What is the time limit under section 15 of the MSMED Act, 2006 ?
Section 15 of the MSMED Act, 2006 mandates that any buyer who purchases any goods or avails any services from a micro or small enterprise registered under the MSMED Act, 2006, must make the payment within the following time limits:
-If there is a written agreement between the buyer and the supplier, then payment must be made within or before the date agreed upon in writing, but not later than 45 days from the date of acceptance or deemed acceptance of goods or services.
-If there is no written agreement between the buyer and the supplier then payment must be made before the appointed day, which means the day following immediately after the expiry of 15 days from the date of acceptance or deemed acceptance of goods or services.
If the buyer fails to make the payment within these time limits, he will be liable to pay interest to the supplier at three times of the bank rate notified by RBI.
Who are micro and small enterprises under the MSMED Act, 2006?
The MSMED Act, 2006 defines micro and small enterprises based on their investment in plant and machinery (for manufacturing enterprises ) or equipment (for service enterprises). The following table shows the classification of enterprises under this Act:
| TYPE OF ENTERPRISE | INVESTMENT IN PLANT AND MACHINERY (Manufacturing ) | INVESTMENT IN EQUIPMENT (SERVICE) |
| Micro | Up to Rs. 25 Lakhs | Up to Rs. 10 Lakhs |
| Small | Above Rs. 25 Lakhs and up to Rs. 5 Crores | Above Rs. 10 Lakhs and up to Rs. 2 Crores |
Applicability and Exclusions of Section 43B (h) Clauses
- Effective from AY 2024-25, not applicable for outstanding amounts as of 31/03/2023.
- Applies only to Micro or Small Enterprises, excluding Medium Enterprises.
- Applicable only to payments for creditor outstanding as of 31-03-2024.
- Not applicable to assessee opting for presumptive taxation under section 44AD/44ADA/44AE.
- Buyer is not mandatory to be MSME.
To avail the benefits under this Act, an Enterprise must register itself under Udyam Registration Portal https://udyamregistration.gov.in/Government-India/Ministry-MSME-registration.htm and obtain an Udyam Registration Number (URN).
How to verify if a supplier is registered under Udyam Registration Portal ?
A buyer can verify if a supplier is registered under Udyam Registration Portal by visiting https://udyamregistration.gov.in/Udyam_Verify.aspx
and entering the URN of the supplier. The Portal will display the details of the supplier such as name, address, category, date of registration etc.
Alternatively, a buyer can also request a copy of MSME certificate from the supplier as proof of registration.
What is an example of Section 43B (h) ?
Let us take an example to understand how section 43B (h) works.
Suppose ABC Ltd. is a company that follows mercantile system of accounting and has a financial year ending on 31st March 2024. It purchases goods worth Rs. 10 Lakhs from XYZ Ltd., a micro enterprise registered under the MSMED Act, 2006, on 1st February 2024. As per the written agreement between them, ABC Ltd. has to make the payment within 30 days from the date of acceptance of goods.
However, ABC Ltd. fails to make the payment within the due date and pays Rs. 10 Lakhs to XYZ Ltd. on 15th April 2024.
In this Case, ABC Ltd. cannot claim deduction of Rs. 10 Lakhs as an expense in the financial year 2023-24. It has not paid the amount within the limit specified in section 15 of the MSMED Act, 2006. it can deduction only the in the financial year 2024-25, when it has actually paid the amount.
If ABC Ltd. has paid Rs. 10 Lakhs to XYZ Ltd. on or before 2nd March 2024, it could have claimed deduction in the financial year 2023-24 it self.
Conclusion:
Section 43B (h) of the Income Tax Act is a significant amendment that affects the tax deductions available to business that deal with micro and small enterprises.it aims to ensure timely payments to MSMEs and improve their cash flow situation. Businesses should be aware of this provision and comply with the payment deadlines under the MSMED Act, 2006, to avoid any disallowance of expense and interest liability.
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