Section 43B of the Income Tax Act of 1961 is proposed to be amended in Clause 13 of the Finance Bill 2023 to disallow deduction for transactions with Micro and Small Enterprises where timely payments are not made.
Section 43B of the Income Tax Act of 1961 is proposed to be amended in order to encourage prompt payments to MSMEs. As a result, any amount payable to an MSME by an assessee after the deadline specified in section 15 of the MSMED Act 2006 would be allowed as a deduction only upon actual payment of the amount.
Furthermore, the provision of section 43B that allows for a time extension up until the due date of the return would not apply to such payments under any circumstances.
Payments must be made within 45 days or on the date specified in the written agreement, whichever comes first, according to Section 15 of the MSMED Act. In the absence of such a written agreement, payment is expected within the next 15 days.
As a result, the deductions available for amounts payable to MSMEs will be limited to those that are based on payment. If the payment is received within the timeframe specified in Section 15 of the MSMED Act, it can only be permitted on an accrual basis.
1. Section 43B provides for certain deductions to be allowed only on actual payment to ensure timely payments to Micro and Small Enterprises. Furthermore, the proviso to section 43B allows accrual based deduction if the amount is paid by the due date of filing the income tax return.
2. It is proposed to include payments made to micro and small businesses within the scope of section 43B in order to encourage timely payments to such businesses. As a result, a new clause (h) is proposed in section 43B to provide that any sum payable by the assessee to a micro or small enterprise after the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. It is also proposed that the proviso to section 43B not apply to payments to micro and small businesses.
3. Section 15 of the MSMED Act requires payments to micro and small businesses to be made within the time specified in the written agreement, which cannot be more than 45 days; if no such written agreement exists, the payment must be made within 15 days. As a result, the proposed amendment to Section 43B will only allow payments as deductions on a payment basis. However, the deduction can only be allowed on an accrual basis if the payment is made within the time frame specified in Section 15 of the MSMED Act.
4. This amendment will go into effect on April 1, 2024, and will apply to the assessment years 2024-25 and onwards.
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This provision is going to hit very badly the assessees as the disallowance is proposed if the payment due to MSME is not made as stipulated in MSMED Act then even if it is made may be within the financial year or before the due date of filing of return. It is alike the provisions w.r.t. employees’ share of EPF and ESI. A recent decision of honourable Supreme Court in the case of Checkmate has made it very clear. Thus every payment to MSME has to be made compulsorily within 15 days or if agreed to upon by the parties then it may be extended upto 45 days but not beyond. There would be number of problems when the seller issued the bill but despatched goods late, it took long time in transport to reach the buyer, the goods were subject to some lab testing and test report took its own time or even delayed, the seller himself proposed credit of more than 45 days etc. and in all such circumstances also the disallowance is going to be made.