Analysis on New Clause (H) of Section 43B of the Income tax Act, 1961

1. Introduction

The Finance Bill 2023 has introduced a significant amendment to the Income Tax Act, 1961, relating to Micro and Small Enterprises (MSMEs) which is applicable from 1st of April, 2023. Specifically, the amendment introduces Section 43B (h), impacting the deduction of overdue payments to MSMEs. This article explains the provisions, implications, and steps for compliance with the new regulation.

2. Clause 43B (h) inserted via Finance Bill 2023 which is reproduced as below

" (h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him

Provided that nothing contained in this section [[except the provisions of clause(h)]] shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under section 139(1) "

The above mentioned clause shows that the payment will need to be made under the specified time duration mentioned in Section 15 of the Micro, Small, and Medium Enterprises Development Act, 2006 for qualifying the claim deduction of the sum liable to get paid to the micro and small enterprises. Also, it is important to note that this clause will be applicable only to micro or small enterprise and not to Medium Enterprises.

3. Deadline Specified in Section 15 of the Micro, Small, and Medium Enterprises Act

Section 15 of the MSME Development Act, 2006 defines that

"Where any supplier* supplies any goods or renders any services to any buyer, the buyer shall make payment therefore on or before the date agreed upon between him and the supplier in writing or, where there is no agreement on this behalf, before the appointed day**:

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall not exceed forty-five days from the day of acceptance or the day of deemed acceptance"

*'Supplier' is defined under Section 2 Clause n which means a micro or small enterprise, which has filed a memorandum with the Authority.

**'Appointed day' is defined under Section 2 Clause b which means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier."

It is understood from the aforementioned section that as agreed between the buyer and supplier the payment must be paid/cleared within 45 days from the acceptance date or from the day of the deemed acceptance i.e. from the acceptance day of the goods or services. Where there is no Agreement that the payment must be made within 15 Days from the day of Acceptance or the Day of Deemed Acceptance of the goods or services.

It is important to note that here supplier must have filed the memorandum with the Authority i.e. Application on the Udhyam Portal must be filed to claim the benefit of Section 15 and 16.

4. Failure to Pay MSMEs within the Timeframe Specified in Section 15 Resulting in Negative Outcomes

The buyer who is not able to perform the payment to the supplier of goods or services as a company enrolled as a micro or small enterprise, will get smashed through the new insertion of Finance bill 2023 vide clause (h) of Section 43B moreover to the compensatory interest liability as levied through the section 16 of MSME Development Act, 2006 and is indeed an ineligible business expense. The outcomes shall be-

(i) Compensatory of the Interest: In which any purchaser would unable to perform the payment of the amount to the supplier as needed under section 15, in any agreement made between the buyer and the supplier or in any regulation for said time the buyer is responsible to pay the compound interest with the monthly rests on that amount from the appointed day to the supplier or according to the case from the date immediately following the date agreed on, at 3 times of the rate of the bank circulated through the Reserve Bank.

(ii) Prohibition of Interest Payments Made as Compensation to MSMEs: the interest payable amount or paid by any buyer under the provision of Section 23 of MSME Development Act, 2006, will not be for the purposes of the calculation of the income under the income tax act 1961 permitted as a deduction.

(iii) Expenditure Disallowance: For the expenses made any sum liable to be paid by the taxpayer or the payment for the purchases to the supplier enrolled as a micro or small enterprise will not be authorized when it does not pay in the specified time duration in 15 of the MSME Development Act, 2006, cited above. If Section 15 is violated than the Expenditure will be allowed only in the year of Payment and not on Accruals Basis under the Income Tax Act, 1961.

5. Meaning of Enterprise as Per MSME Development Act, 2006

Meaning of Enterprise is mentioned in Section 2 Clause e of the MSME Development Act, 2006 which is as mentioned below:

A business concern or an industrial undertaking or any other establishment through any name it called termed an enterprise, is involved in the manufacture or production of goods, related to any industry established in the First Schedule to the Industries (Development and Regulation) Act, 1951 or has the operation in providing or the rendering of any service or services.

It is important to clarify that the Traders has been specifically excluded from the Definition of the Enterprise. Also, the MSME Policy Division via Dated 01.09.2021 has issued an office Memorandum regarding specific exclusion of the Traders from the benefit of the provision of Delayed Payments as per MSME Development Act, 2006.

6. Type of Enterprise as per MSME Development Act, 2006

The enterprise category as Micro, Small & Medium is defined in Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 which is as mentioned below:

7. Practical Scenario

Sodhi, a proprietor has received services (or purchase of goods) of Rs. 5 lakhs from Supplier XYZ Partnership firm - small MSME registered, in F.Y. 2023-24. Is the service (or purchase of goods) allowed as expenses to Sodhi in F.Y. 2023-24 in the following scenarios? Note- Credit period of 45 days agreed between both parties. Income Tax Return for FY 2023-24 is filed on 31st July, 2024.

8. Reporting for CAs'

A. Tax Audit Report- Clause 22, Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006.

B. Annual Report for Companies

1. the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;
2. the amount of interest paid by the buyer in terms of section 16, along with the amounts of the payment made to the supplier beyond the appointed day during each year;
3. the amount of interest due and payable for the period of delay in making payment but without adding the interest specified under this Act;
4. the amount of interest accrued and remaining unpaid at the end of each year; and
5. the amount of further interest remaining due and payable even in the succeeding years, until actually paid

9. Summary w.r.t Section 43B(h) of the Income Tax Act, 1961

• Provision applicable to all assesses/Supplier (irrespective of audit/turnover) in case of payment to micro or small enterprise and not to Medium enterprise.
• If expense incurred and paid within financial year, it is allowed irrespective of credit period.
• If expense incurred during financial year and paid in next financial year within credit period allowed, expense allowed.
• If expense incurred during financial year and paid in next financial year beyond credit period allowed, expense disallowed and allowed in the year of payment.
• Interest on delayed payment: disallowed.