Section 43B(h): A Comprehensive Analysis and Frequently Asked Questions

Overview

The Finance Act of 2023 introduces a new sub-section under Section 43B of the Income Tax Act, 1961, effective from April 1, 2024, impacting payments made after April 1, 2023. This subsection addresses overdue payments to MSMEs as per the MSMED Act, 2006, allowing deduction only in the year the payment is made, under the head Profits and Gains from Business or Profession (Section 28 of the Income Tax Act, 1961).

Applicability

Section 43B(h) applies exclusively to assesses falling within the micro or small enterprise categories, explicitly excluding medium enterprises. To better understand this provision, let’s distinguish between Micro, Small, and Medium Enterprises based on investment and turnover criteria:

Criteria	Micro Enterprises	Small Enterprises	Medium Enterprises
Investment	Not exceeding Rs. 1 Crore	Between Rs. 1 Crore and Rs. 10 Crore	Between Rs. 10 Crore and Rs. 50 Crore
Turnover	Below Rs. 5 Crore	Between Rs. 5 Crore and Rs. 50 Crore	Between Rs. 50 Crore and Rs. 250 Crore

In adherence to Section 7 of the MSMED Act, 2006, Micro, Small, and Medium Enterprises  (MSMEs) share a common foundation, engaging in manufacturing/production or service provision within the defined parameters of the Industries (Development and Regulation) Act.

Note: Traders are specifically excluded from the definition of enterprise, making provisions of section 43B(h) provisions inapplicable to traders.

Consequences

• Disallowance of Expense Deduction: If a buyer exceeds the agreed time limit of 45 days and 15 days for payments to an MSME Supplier (micro or small enterprises), the associated expense amount will be disallowed in the computation of income tax for the relevant assessment year. However, it will only be allowed in the year of payment.
• Additional Interest on Late Payment by Assessee: Delays in payments to Micro or small enterprises beyond the time specified in the MSMED Act, 2006, attract additional interest charges at a rate three times that of the Bank rate notified by the RBI as per MSMED Act,2006.
• Disallowance of Interest on Late Payment to MSME Supplier: Any additional interest payment made by the buyer due to delayed payment to Micro or small enterprises beyond a specified period will be disallowed under section 37 of the Income Tax Act, 1961 when computing income tax for the relevant assessment year.

Positive Impact

It can further be divided into two parts:

1. For Suppliers (Micro and Small Enterprises):
   1. Increased Cash Inflow: Section 43B(h) incentivizes timely payments from buyers, ensuring faster cash flow for MSMEs. This improves their financial stability, working capital management, and ability to invest in growth.
   2. Enhanced Bargaining Power: The provision empowers MSMEs to negotiate better payment terms with buyers, knowing that delayed payments will have tax consequences for the buyer. This strengthens their bargaining position and encourages fair payment practices.
   3. Less Dependency on Loans: Improved cash flow from timely payments reduces reliance on expensive loans and credit, lowering financial costs for MSMEs.
   4. Boost Trust and Transparency: The requirement for documentation like Udyam certificates fosters trust and transparency between buyers and suppliers, creating a more reliable and efficient business environment.
2. For Buyers:
   1. Improved Compliance: Section 43B(h) encourages buyers to adhere to payment deadlines mandated by the MSMED Act, promoting compliance and avoiding potential legal and financial penalties.
   2. Better Relationships with Suppliers: Timely payments foster stronger relationships with MSME suppliers, leading to improved quality, service, and reliability.
   3. Reduced Risk of Late Payment Fees: Adherence to payment deadlines helps buyers avoid incurring additional interest charges due to late payments.
   4. Elevate Reputation: Responsible payment practices towards MSMEs contribute to a positive corporate image and brand reputation.

Overall, Section 43B(h) promotes a win-win situation for both buyers and suppliers, fostering a more equitable and sustainable business ecosystem.

Negative Impact

1. For Suppliers (Micro and Small Enterprises):
   1. Administrative Burden: Obtaining and maintaining Udyam certificates and other compliance documents can be time-consuming and expensive for small businesses.
   2. Limited Applicability: The exclusion of traders and medium enterprises leaves some vulnerable suppliers outside the protection of this provision.
   3. Potential Disputes: Misinterpretations or disputes regarding payment deadlines, agreements, and deductions could lead to legal complications and delays in receiving payments.
   4. Reduced Business Opportunities: Some buyers might opt for alternative, non-MSME suppliers to avoid the complexities of Section 43B(h), potentially impacting MSME sales. 

2. For Buyers:
   1. Increased Short-Term Costs: Stricter payment deadlines may require adjustments in cash flow management, leading to temporary financial strain for some buyers.
   2. Operational Challenges: Adapting existing procurement processes and systems to comply with the new regulations can be challenging and resource-intensive.
   3. Reduced Flexibility: Limited discretion on payment terms might hinder strategic negotiations and limit flexibility in managing cash flow, especially for large or complex projects.
   4. Unintended Consequences: Strict enforcement might lead some buyers to adopt unethical practices to circumvent the regulations, potentially harming the overall business environment.

It’s important to acknowledge that while Section 43B(h) has positive intentions, its implementation may have unforeseen consequences for both buyers and suppliers.

Illustrations

FAQs

• When do the provisions of Section 43B(h) come into effect?

The provisions of Section 43B(h) come into effect from 1st April 2024.

• On which suppliers will these provisions be applicable?

These provisions apply to suppliers registered as Micro or Small Enterprises under the MSMED Act, 2006

• Are traders registered under the MSMED Act, 2006 covered within the purview of this section?

No, traders are explicitly excluded from the definition of enterprise, whether registered or not under the MSMED Act, 2006.

Traders, even with Udyam registration, are excluded from Section 43B(h) benefits. While they can register for getting benefit of priority sector lending only, delayed payment provisions don’t apply to them. This was clarified in an official memorandum 1/ 4(1)/2021-P&G Policy dated September 1, 2021.

• How can the buyer verify whether the supplier is registered under the MSMED Act, 2006?

Buyers need to obtain a copy of the Udyam Certificate along with a declaration confirming the supplier’s registration under the MSMED Act, 2006.

• What is the payment time period under the MSMED Act, 2006?

As per the provisions of the MSMED Act, 2006, the payment period for MSMED suppliers is 45 days from the date of agreement and 15 days if there is no agreement between the supplier and buyer.

• When should the calculation of the 45-days/15-days period commence?

Under the MSMED Act, 2006, the calculation of the 45-days/15-days period starts from the date of delivery of goods. The invoice date is not considered.

• When does the 45-days/15-days calculation period begin if the goods are submitted for approval?

In the case of goods sent for approval, the calculation of the 45-days/15-days period commences from the date of deemed acceptance of goods.

• Does one need to pay all the creditors within the 45 days/15 days time period?

No, this provision applies only to small or micro-enterprises.

• Can payments made after the due date be carried forward for deduction?

Payments made after the due date specified in the MSMED Act, covered under Section 43B(h), are allowed as a deduction only in the year of payment.

• Are the balances outstanding as of 31.03.2023 also covered and liable to be paid?

No, only balances outstanding as of 31.03.2024, due for more than 45 days (if an agreement exists; otherwise, 15 days), are covered.

• Is the entire purchase amount to be disallowed, including GST?

No, GST on purchases will not be disallowed provided GST has been shown as a liability in the books; otherwise, the full amount shall be disallowed.

• Is Section 43B(h) applicable for assesses filing ITR under presumptive taxation?

No, the provisions of Section 43B(h) are not applicable to assesses filing ITR under presumptive taxation.