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DECODING SECTION 43B(H) : IMPACT OF DELAY IN MSME PAYMENTS

The Finance Act 2023 applicable for FY 2023-24 introduced an additional clause (h) into Section 43B, specifying that any payment due to a micro or small enterprise (MSME) exceeding the time limit of 15 days, or a maximum of 45 days, specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act), will be allowed as a deduction on payment basis. Let’s understand it in detail:

APPLICABILITY:

This section applies to every business entity in India, including companies, proprietorships, partnership firms, or LLPs, when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006.

This amendment takes effect from 1st April, 2024 and will accordingly apply in relation to the assessment year 2024-25 and subsequent assessment years.

WHAT ARE MSMEs?

The MSME sector in India plays a crucial role in employment generation, nurturing entrepreneurship, and promoting economic development in India. And that is why to protect their interests, the Central Government has come up with the new provision to ensure timely payments to them.

The Central Government, hereby notifies the following criteria for classification of micro, small and medium enterprises, namely :

a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;

a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

TIME LIMIT FOR PAYMENTS MADE TO MSMEs:

Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.

Additionally, several other laws have outlined provisions for the timely payment of dues to such enterprises.

You can refer to below examples for better understanding:

*Date of Invoice:*	*Due Date as agreed in written agreement:*	*Due Date as per MSME Act:*	*Deduction will be allowed in the FY:*
12/01/2024	26/02/2024	26/02/2024 (45 days from invoice date, in case there is written agreement)	If payment is made on or before 26/02/2024, or before 31/03/2024 then deduction will be allowed in year FY 2023-24. And if payment is made after 31/03/2024, then deduction will be allowed in the year of actual payment.
17/02/2024	01/04/2024	01/04/2024 (45 days from invoice date, in case there is written agreement)	If payment is made on or before 01/04/2024, then deduction will be allowed in year FY 2023-24. And if payment is made after 01/04/2024, then deduction will be allowed in the year of actual payment.
25/03/2024	08/05/2024	08/05/2024 (45 days from invoice date, in case there is written agreement)	If payment is made on or before 08/05/2024, then deduction will be allowed in year FY 2023-24. And if payment is made after 08/05/2024, then deduction will be allowed in the year of actual payment.
15/04/2024	29/05/2024	29/05/2024 (45 days from invoice date, in case there is written agreement)	If payment is made on or before 29/05/2024, or before 31/03/2025 then deduction will be allowed in year FY 2024-25. And if payment is made after 31/03/2025, then deduction will be allowed in the year of actual payment.

Note: If there is no written agreement, then payment should be made within 15 days.

CONSEQUENCES OF DELAY IN PAYMENT:

Increase in Taxable Income and Tax Liability: any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the MSMED Act shall be allowed as deduction only on actual payment. So, if an enterprise has not made payment to MSME within 45 days, then it will attract the provision of Section 43(b)(h) and such payment will be allowed as deduction only in the financial year in which payment is actually made., thus increasing the taxable income due to non-deduction and increased tax liability for the current year.

Additional Interest: In the case of late payment to an MSME, Buyer will be liable to pay compound interest with monthly rests to the MSME supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank. And deduction of this interest is not allowed as an expense under Income-Tax Act.

Additional ROC Compliance: *Specified companies should file Form MSME-1 when payments are due to MSME for more than 45 days from the date of acceptance of the services or goods, along with the reason for its delay.

*Specified companies are companies- that have obtained goods or services from the MSME, whose payments to the MSMEs exceed 45 days from the date of acceptance or deemed acceptance of the goods or services.

Hence, it is recommended to settle dues to MSMEs within the time limit as specified under Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) which is 45 days.

Hope this article was able to answer all your questions. If not, you can always contact us.

Curated By: Yash Jain