Deciphering amendment with respect to allowability of payments made to Micro and Small Enterprises

Deciphering amendment with respect to allowability of payments made to Micro and Small Enterprises (amendment of clause h in section 43B of Income Tax Act,1961).

Introduction

In the ever-evolving landscape of Indian taxation, a significant amendment has been made to the Income Tax Act, 1961, specifically under Section 43B(h), effective from 1st April 2023. This amendment directly impacts the financial dealings between businesses and Micro & Small Enterprises (MSEs) as defined under the MSMED Act, 2006. This article aims to deep exploration into the facts of this amendment, focusing on its implications for the payment timelines to MSEs, the definition and scope of MSEs under the MSMED Act, and the consequential financial and legal repercussions of delayed payments. By understanding these changes, businesses can better navigate the regulatory environment and favour more sustainable relationships with MSEs, which are crucial to the fabric of the Indian economy.

Payments To Micro & Small Enterprises.

“Any sum payable by the assessee to a Micro or Small enterprise beyond the time limit specified in MSMED Act, 2006 shall be allowed only in the year when actual payment is made by the assessee.

What are MSE (Micro & Small enterprises)?

“Micro and Small Enterprises as per Section 2(h) and 2(m) of MSMED Act, 2006, Medium enterprises registered in MSMED Act, 2006, are not covered in this provision of priority payment.”

As per the MSMED Act, 2006

In the Act, Enterprise is defined as

 “Enterprise means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services.”

Considering this definition, it explains that only establishments engaged in the manufacturing of Goods or in rendering of services are covered under this provision. Hence Traders and Work contractors are not covered for the privilege of this provision of priority payment.

What is the prescribed time limit?

Section 15 of MSMED Act, 2006

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

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.

(Appointment Day = The day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.)”

The provision states that when a buyer procures any goods or renders any services from Enterprises categorised as Micro and Small in MSMED Act, 2006, are required to make Payment within 15 days from the date of acceptance of goods or services, however this date can be extended to maximum 45 days from the date of acceptance if there exists an agreement regarding date of payment between buyers and sellers.

Consequences of Delay in payment?

As per section 16 of MSMED Act, 2006,

“Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank”

According to this provision if the buyer fails to comply with payment within the time limit mentioned in section 15, he will be liable to pay compounding interest with monthly rests on the said amount to supplier from day after end of prescribed limit of 15/45 or agreement date whichever is earlier. The rate of interest will be thrice of the bank rate specified by RBI, currently 20.25%.

Allowance/Disallowances u/s 43B(h) _{(w.e.f. 1st April, 2023)}

 “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

(Applicability: Applicable to all assessee irrespective of audit requirements or turnover criteria in case of payment to Micro & Small Enterprises.)”

Section 43B allows Certain deductions of expenses to be only on actual payment basis only if they are paid on or before the due date of filing the return. If paid after due date of filing of return then it will be allowed in FY in which they are paid.

As per 43B(h) Deduction regarding payment to MSE establishments will be allowed in financial year in which it is paid. However, if the due date falls in next financial but does not exceed limit of section 15 of MSME Act then the same will be allowed in year of Purchase,

But if the date of payment falls in next financial year and exceeds prescribed limit, then the deduction for the same will be allowed in next financial year i.e. in the financial year in which it is paid.

Accordingly, if the payment is delayed and triggers penal interest, then such penal interest is disallowed to assessee(buyer).

To simplify please refer the table below for clear understanding,

To understand this, there are certain cases for allowances/disallowances discussed below.

Remarks of the above Cases: -

Case 1: -

In this case the date of procurement is prior to 1st April 2023, hence the provision of Section 43B(h) will not be applicable.

Case 2: -

In this case the payment to the supplier has been made within the date agreed upon, hence the amount will be allowed in F.Y. 2023-24.

Case 3: -

Here, the date of agreement for payment exceeds limit of 45 days, hence period till 45 days from date of acceptance will be considered. Payment is made on 27^th Dec, 2023, which exceeds limit of 45 days, therefore interest is levied at thrice of bank rate notified by RBI.

However, the principal amount is paid within same financial year therefore, it will be allowed for deduction.

Case 4: -

In this case, the agreed date of payment is within limit of 45 days and the payment has been made within agreed date therefore no interest will be levied, and as the payment is made within prescribed limit regardless of falling in next FY 2024-25, the deduction for the same will be allowed in FY 2023-24.

Case 5: -

In this case, as since no date has been agreed upon for the payment, therefore according to section 15 of MSMED Act, 2006, the limit will be 15 days from the date of acceptance i.e. 09/04/2024, the payment has been made within limit hence, the interest will not be applicable and as the payment is made within time limit and therefore, the deduction for principal amount will be allowed to assessee in FY 2023-24 regardless of date of payment falling in FY 2024-25.

Case 6: -

Here, since no date has been agreed upon, the payment is required to be made within 15 days from the date of acceptance.

In this case, the payment has not been made within 15 days from the date of acceptance. Therefore, interest is payable on the same. Moreover, the principal repayment will also be disallowed in F.Y. 2023-24, and only be allowed in F.Y. 2024-25 on payment basis as per Section 43B(h).

Case 7: -

In this case, the agreed date of payment exceeds limit of 45 days, therefore, only the period up to 45 days from the date of acceptance will be considered. Date of payment i.e. 04/05/2024 does not exceeds the limit as per Section 15 of MSMED Act, 2006, therefore, no interest will be levied and the deduction for principal payment will be allowed in FY 2023-24.

Case 8: -

Here, the agreed date between the buyer and the seller is within forty- five days. But payment is made on 16/05/2024, which exceeds the 45 days limit.

Therefore, interest on the same is payable to the supplier. Moreover, since, there is principal amount remaining outstanding beyond the prescribed time limit, it will be disallowed in F.Y. 2023-24, and only be allowed in F.Y. 2024-25.

Key Takeaways from this amendment

• In this fourth quarter of FY 2023-24, it is imperative to give special attention to outstanding creditors in the micro and small categories. Business owners are obliged to compile a comprehensive list of such micro and small creditors to whom purchases were made in FY 2023-24, whose payments remain unsettled.

• Accounting software will be required to be realigned to include categorisation of creditors into micro and small along with inclusion of due date of payment as per the agreement and automatic calculation of due date of payment to such creditors as per the act. Tailormade reports for the same will be required to be generated from the software for better compliance of this amendment.

• Auditors, on the requirement of Buyer, are required to verify creditors more deeply about the status of their genuine registration under MSMED Act, 2006.

Impact of this section

1. Micro & Small Enterprises

• Short credit periods.

• Increase in rate of survival.

• Financial soundness and stability.

• Protection against delay in payment from buyers.

• Interest income at thrice of bank rate on delay payments.

2. Economy

• Transparency due to increase in registration of MSE

• Short credit periods will increase economic cycle which lead to increase in consumption

• Monetary circulation will increase.

• Increase in Tax collection due to transparency

• Growth of Micro & Small Enterprises.

Conclusion

The amendment under Section 43B(h) of the Income Tax Act, 1961, signifies a substantial shift in the fiscal dynamics between larger businesses and Micro & Small Enterprises in India. This change not only underscores the importance of timely payments to MSEs but also imposes stringent penalties for delays, thereby reinforcing the economic backbone of these smaller entities. The impact of this amendment transcends beyond individual business transactions, echoing in the broader economic landscape by enhancing the survival rate, financial stability, and growth of MSEs. Businesses, therefore, must adapt to these changes with heightened diligence and compliance to contribute towards a more robust and equitable economic environment. As this amendment unfolds, it is expected to bring about a transformative wave and accelerating the economic cycle in the Indian market.

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