A new clause inserted by the Finance Act of 2023 allows deductions made to MSMEs on an actual payment basis instead of an accrual basis if the payment is made within the threshold limit. This section has been applicable since 1st April 2023. As we approach the end of the year, it is essential to scrutinize our activities to avoid any disallowances under the Income Tax Act of 1961.
Time Limit under Section 43B(h)
Income Tax under this clause has allowed the credit limit as per Section 15 of the MSMED Act, 2006 which states that maximum time limit of the credit is 45 days in case it was agreed between both parties in writing otherwise it is 15 days in the absence of written agreement. In case of default of the payment within 15 days/45 days, buyer is liable to pay compound interest at three (3) times of the bank rates notified by RBI.
Revised Definition of MSME with effect from 1st July 2020: Definition is prescribed as per table mentioned below which is a composite criterion:
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In case of Goods & Services (Both) |
Micro Enterprises |
Small Enterprises |
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Turnover and |
Less than or equal to INR 5 Crore |
Less than or equal to INR 50 Crore |
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Investment in Plant & Machinery |
Less than or equal to INR 1 Crore |
Less than or equal to INR 10 Crore |
What if the payments are not made within due time i.e. 15 days/45 days
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Transaction with MSME |
Without writing the terms |
In writing the terms |
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Revenue/Capital Nature |
15 days as per section 2(b)- {day before the appointed day i.e. 15 days} |
45 days from the date of acceptance/deemed acceptance |
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Penalty in case of Default |
Compound Interest at three (3) times of the bank rates notified by RBI |
Compound Interest at three (3) times of the bank rates notified by RBI |
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Disallowance of interest payment |
Such interest payment is a penal in nature and hence, will not be considered as business expenditure u/s 37 |
Such interest payment is a penal in nature and hence, will not be considered as business expenditure u/s 37 |
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In case of Default i.e. payment is made after 15days/45days but during the same FY 2023-24 i.e. upto 31st March 2024 |
Payment to Supplier has to be made along with interest but only invoice amount (without interest) shall be allowed under Income Tax u/s 43B(h) |
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In case of Default i.e. payment is made after 15days/45days which crosses 31st March 2024 i.e during the following financial year i.e. FY 2024-25 but before to file the ITR for the AY 2024-25 (FY 2023-24) |
Such payment shall be disallowed along with interest during the FY 2023-2024 under section 43B(h) and its interest shall be disallowed u/s 37(1). However such payment (without interest) shall be allowed on payment basis as and when the payment is made during the relevant financial year i.e. FY 2024-25 There is no impact on the given answer while filing the ITR. |
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In case of Default i.e. payment is made after 15days/45days but after 31st March 2024 during the following financial year i.e. FY 2024-25 but after filing of ITR for the AY 2024-25 (FY 2023-24) |
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Precautions to be taken before to cross last day of the financial year i.e. 31st March 2024
- Get the MSME Certificates from all the creditors: Send an email to all the creditors and get their MSME Certificates if any and update such data in your records.
- Undertaking from Micro and Small Enterprises: In case, suppliers/creditors do not provide you MSME Certificate as they are not registered then be assured that you have taken an undertaking from all of them in writing.
- Maintain aging of the creditors: If there are some creditors payments dues then ensure to maintain their aging so that credit period may be calculated.
- Report in Tax Audit: Auditor must ensure that client/assessee has adhered this provision and in case of default in payment, such disallowance must be reported in Tax Audit Report.
- Best Practice to get MSME Certificate while placing an order to any vendor and it should be updated each year to ensure category of the vendor does not fall from Micro/Small to Medium/Large Enterprise.
Advisory issued by Govt of India
Please ensure that such an advisory should be followed by vendors if they are registered under MSME Act:
"it is advisable that the Micro or Small Enterprises should mention/get printed on their letterheads, supply order sheets, invoices, bills and relevant documents, the Entrepreneurs Memorandum (EM) number…., so that there always remains an identification of being an MSE supplier".
FAQs
1. How to recognise an entity as MSME?
As per section 8(1) of MSMED Act, 2006, supplier means authority who has filed memorandum with the authority (i.e. has obtained Udyam Registration), hence to invoke section 43B(h), it is important for supplier to register itself and get the Udyam Registration
2. How to verify the Udyam Registration Number given by Supplier?
It can be verified through https://udyamregistration.gov.in/udyam_verify.aspx.
3. Do disallowances attract towards purchase of capital goods?
Yes, there is no distinction is made u/s 43B between capital or revenue expenditure. Hence, it is applicable towards both.
4. What does written agreement means?
Agreement is no where defined in the act therefore it may be oral or written however any written document which contains the agreed time period shall be deemed to be the agreement under this provision.
Conclusion
In summary, strict compliance with Section 43B(h) and proactive measures are imperative to navigate financial transactions with MSMEs and prevent disallowances under the Income Tax Act.
The author can also be reached at info@legitax.in
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