Introduction
The government has recently introduced an amendment to the Income Tax Act, under Section 43B(h), aimed at supporting the growth of India’s MSME (Micro, Small, and Medium Enterprises) sector. This new provision mandates that payments owed to MSMEs must be made within the agreed-upon time frame, ensuring better liquidity and cash flow. It fosters a more transparent and compliant ecosystem for the MSME sector. Here’s a closer look at the key aspects of this amendment.
Understanding Section 43B(h)
Section 43B(h) pertains to the timely payment of MSMEs, specifying that any payment for goods or services provided by an MSME must be settled within the timeframe defined under the Micro, Small, and Medium Enterprises Development
(MSMED) Act, 2006. This ensures that companies can deduct such payments in the same financial year only if they meet the stipulated deadlines.
What Defines an MSME?
MSMEs are classified based on their investment in plant and machinery and their annual turnover:
- Micro-enterprises: Investment up to 1 crore, turnover under 5 crore.
- Small enterprises: Investment up to 10 crore, turnover under 50 crore.
- Medium enterprises: Investment up to 50 crore, turnover under 250 crore. ₹₹
Enterprises must also register on the UDYAM portal to benefit from government
schemes.
Implementation of Section 43B(h)
Effective from April 1, 2024, Section 43B(h) will apply to all income tax returns filed for the 2024-2025 assessment year. It covers any entity purchasing goods or services from an MSME registered on the UDYAM portal, whether or not the buyer is registered on UDYAM.
Applicability to Traders
While wholesale and retail traders can register on the UDYAM portal to access priority sector lending, they are excluded from the benefits of Section 43B(h) as the MSMED Act focuses on manufacturers and service providers.
Payment Timelines
The payment timelines under this section depend on the agreement between the buyer and the MSME:
- With an agreement: Payments must be made on the agreed due date, or within 45 days of accepting goods or services.
- Without an agreement: Payments must be settled within 15 days of acceptance. Any disputes must be resolved within 15 days.
Penalties for Delayed Payments
If the buyer fails to meet the payment timeline, they will be charged compound interest at a rate three times the RBI’s notified bank rate, starting from the expiry of the agreed-upon period or 15 days after acceptance of the goods or services
Impact on GST and Input Tax Credit (ITC)
- If ITC is claimed on GST: The base amount (excluding GST) must be paid within the timeline. If delayed, the base amount is disallowed as a deductible expense until payment is made.
- If GST is not claimed as ITC: The entire amount, including GST, becomes part of Section 43B(h), and any delay in payment disallows the total sum as a deductible expense.
Key Benefits of Section 43B(h)
- Encourages Timely Payments: The provision pushes large companies to clear MSME dues promptly, enhancing liquidity for MSMEs.
- Strengthens MSME Bargaining Power: MSMEs gain stronger negotiating power in payment terms and deadlines.
- Reduces Payment Disputes: Timely payments reduce conflicts, saving resources for both MSMEs and buyers.
- Supports Better Tax Planning: Corporates can plan their taxes better by claiming deductions on payments made within the prescribed timelines.
- Promotes Transparency and Compliance: This section fosters a culture of ethical business practices and financial transparency.
Conclusion
Section 43B(h) is a significant step toward fortifying the MSME sector by promoting timely payments and financial discipline. By ensuring better liquidity and fostering a transparent environment, it empowers MSMEs, enabling them to contribute more to the economy and positioning India as a global leader in entrepreneurship and manufacturing. This regulation is a key enabler for both MSMEs and larger enterprises to work in a more structured and compliant manner, benefiting the entire business ecosystem.
