The Government has reiterated that Section 43B(h) of the Income Tax Act was introduced to promote timely payments to Micro and Small Enterprises (MSEs) and address their long-standing working capital challenges.
Responding to an Unstarred Question in the Rajya Sabha, Minister of State for Finance Shri Pankaj Chaudhary explained that the provision, introduced through the Finance Act, 2023, disallows tax deductions on payments due to micro and small enterprises unless such payments are actually made within the timelines prescribed under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
Under the MSMED Act, payments to eligible micro and small enterprises must generally be made within the agreed period, which cannot exceed 45 days. The tax provision links deductibility of expenses to actual payment, thereby encouraging buyers to clear dues on time.
The question raised in Parliament sought clarification on whether the enforcement of Section 43B(h) had resulted in large and medium-sized buyers cancelling orders from registered MSMEs, shifting to unregistered vendors, or pressuring suppliers to surrender their Udyam registration.
In response, the Government highlighted that several measures have been taken by the Ministry of MSME to improve credit flow and ensure timely payments to MSMEs. It further noted that Section 43B(h) was specifically inserted to enforce the 45-day payment timeline prescribed under the MSMED Act by restricting tax deductions until actual payment is made to eligible Micro and Small Enterprises.
The Government also clarified that the provision applies only to amounts payable to micro and small enterprises as classified under notifications issued under the MSMED Act, 2006.
According to the Finance Ministry, the provision was introduced after extensive consultations with stakeholders, including the Ministry of MSME. The primary objective is to improve liquidity for micro and small enterprises by ensuring faster realization of dues, thereby reducing their dependence on external financing and lowering the cost of arranging working capital.
The clarification comes amid continuing discussions within industry circles regarding the practical impact of Section 43B(h) on buyer-supplier relationships and compliance requirements. While concerns have been raised by certain stakeholders, the Government maintains that the provision is intended to strengthen the financial position of micro and small enterprises through timely payment discipline.
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