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Finance Bill 2023: Impact of Section 43B(h) on MSE’s Payment

By Rahul Income Tax

Introduction:

The Finance Bill 2023 introduces a significant amendment to Section 43B of the Income Tax Act 1961, incorporating a new clause (h). This addition is designed as a Socio Economic Welfare Measure to ensure timely payments to micro and small enterprises.

Section 43B and the Insertion of Clause (h):

Section 43B of the Income Tax Act outlines deductions allowed only on actual payment. The newly inserted Section 43B (h) specifies that any sum payable by the assessee to a micro or small enterprise must be settled within the time limit prescribed in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006.

Time Limit under Section 15 of MSME Development Act, 2006:

Section 15 mandates that buyers make payments for supplied goods or services on or before the agreed-upon date in writing. In the absence of a written agreement, payment should be made before the appointed day, not exceeding 45 days from the date of acceptance.

Consequences of Non-Compliance:

Failure to make timely payments to micro and small enterprises entails consequences as outlined in the Finance Bill 2023:

  1. Compensatory Interest: Buyers failing to adhere to Section 15 are liable to pay compound interest at three times the RBI Repo Rate from the appointed day or the agreed-upon date.
  2. Disallowance of Compensatory Interest: Section 23 of the MSME Development Act prohibits the deduction of interest paid under the Act for income tax purposes.
  3. Disallowance of Expenditure: Any sum payable by an assessee to a micro or small enterprise beyond the specified time limit results in the disallowance of expenditure.

Applicability and Identification of Organizations:

Clause (h) of Section 43B applies exclusively to sums payable to micro and small enterprises. Therefore, the sum payable to Medium enterprises are eligible for deduction on an accrual basis.

Definition and Classification of Enterprises:

An enterprise, as defined in Section 2(e) of the MSME Development Act, encompasses industrial undertakings, business concerns, or establishments engaged in manufacturing, production, or service provision. Classification is based on investment and turnover:

  1. Micro Enterprise: Investment < Rs. 1 crore, Turnover < Rs. 5 crore
  2. Small Enterprise: Investment < Rs. 10 crore, Turnover < Rs. 50 crore
  3. Medium Enterprise: Investment < Rs. 20 crore, Turnover < Rs. 100 crore

Practical Measures:

Business entities are advised to obtain an Annual Declaration from suppliers confirming their micro or small enterprise status. Micro and small enterprises should mention their registration on invoices to facilitate compliance.

Effective Date of Clause (h):

The applicability of clause (h) of Section 43B commences from April 1, 2024. Outstanding sums payable to micro and small enterprises beyond the specified time limit as of the last day of the financial year 2023-24 and onwards will be disallowed and added back to income from April 1, 2024.

Related reading: TDS and TCS rate chart for Tax Year 2026-27 | Top 5 income tax filing mistakes. Need help tracking MSME payables? See our accounting services.

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