One of the major problems being faced by the MSMEs entities is not-getting their dues from their buyers on a timely basis.
To solve this problem government has taken various steps, now Section 43B of the Income Tax Act, 1961 ("IT Act") has been amended to provide a deduction of the sum payable to Micro Enterprise or Small Enterprise ("MSME") otherwise allowable only on a payment basis.
As per this amendment, any sum payable by an assessee to MSME supplier beyond the time limit specified in section 15 of the Micro Small and Medium Enterprises Development Act, 2006 ("MSMED Act") shall be allowed as a deduction in the year in which actual payment has been made.
If a buyer is entering into an agreement with an MSME supplier, the due date of payment cannot exceed 45 days from the date of actual delivery of goods or rendering of services as the case may be. Where there is no written agreement, the due date will be the 16th day of actual delivery.
In case defects have been found in goods/services, the date of actual delivery shall be counted from date of rectification of defects by supplier.
Meaning thus that payment to all MSME parties is to be made maximum within 15 days of date of invoice or 45 days of date of invoice, if there is a specific agreement regarding the same. In other words, all the invoices received during the financial year 2023-24, invoices till 15-2-24 (provided there is a specific agreement) needs to be paid till 31-3-2024 if disallowance under Sec 43B is to be avoided.
Note: MSME Act specifically states that payment terms cannot go beyond 45 days from date of invoice.
Effect of amendment in Section 43B of Income Tax Act
1. Disallowance u/s. 43B of the Act in respect of an amount payable to MSMEs suppliers will not be attracted if the amount payable to MSMEs suppliers is cleared before the end of the financial year.
So, transactions within the year which are paid before 31st March 2024 will not come within the purview of this section.
2. Purchase on or before 16th March 2024 will attract disallowance u/s. 43B of the IT Act if payment is not cleared before the end of that financial year. (Provided no due date has been agreed in writing).
Remember that the entire amount of invoice will get disallowed, irrespective of the taxable income of the assessee.
For example, if we take a random example and say Rs. 12,54,800 was not paid to MSME vendors as on 31-3-2024, then this amount will get disallowed in Income Tax Computation, meaning thereby that company would be asked to pay Rs. 351,000 extra income tax on it.
3. Purchase after 16th March 2024 will not attract disallowance u/s 43B, if paid within the stipulated time frame.
Suggested solutions
1. A declaration of MSME status along with Udyam registration certificate should be taken from suppliers.
Note: these provisions are applicable on following enterprises -
- Micro (M) - Investment in Plant and Machinery or Equipment - Not more than Rs.1 crore and Annual Turnover - not more than Rs. 5 crores.
- Small (S) - Investment in Plant and Machinery or Equipment - Not more than Rs.10 crore and Annual Turnover - not more than Rs. 50 crores.
And not applicable on the following enterprise
Medium (ME) - Investment in Plant and Machinery or Equipment - Not more than Rs.50 crore and Annual Turnover - not more than Rs. 250 crores.
So, it is important to read the certificate carefully to know correct classification of the supplier.
2. In case any defect in goods or deficiency in service is noticed, then an objection in writing should be made within 15 days. Date of removable of objection by the vendor should also be kept in record as counting of due date will start from this date.
3. As per O.M. 5/2(2)/2021-E/P & G/Policy dated 02-07-2021, wholesale and retail trader are entitled for Udyam registration only for the benefit of Priority Sector Lending only. So, purchase from traders would be outside the purview of these amendments.
4. There may be a situation that an assessee issues a cheque to the MSME supplier and due to some reason MSME supplier don’t encash it within the due date. In light of the judgment of Hon’ble High Court of Punjab and Haryana in case of CIT v. Hindustan Wire Products Ltd. [2002] 120 Taxman 744 (Punjab & Haryana), disallowance u/s. 43B of the Act should not be attracted.
However, the company will be required to prove that default of supplier in encashing the cheque through following documents –
a) Copy of cheque with date of payment
b) Copy of delivery of cheque to supplier. Needless to say that delivery should be within stipulated time frame.
The author is a practicing CA and specialising in the field of GST and can be reached at info@idtinsightindia.com
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