Section 43B(h) - Income Tax Implications w.r.t MSME from AY 2024-25

Introduction

Commencing from April 1, 2024 (AY 2024-25), Section 43B(h) of the Income Tax Act introduces significant changes concerning expenses related to purchases or services from Micro and Small Enterprises (MSMEs).

What is Section 43B(h)?

• As per Section 43B Clause (h) of the Income Tax Act and 15, 16, and 2(b) of the MSME Act, Expenditure related to Purchases / Services taken from Micro and Small Enterprises will only be allowed if the payment is made within the time limits as per Section 15 of MSME Act.

What is Section 15 of MSME Act?

• 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 45 days from the day of acceptance or the day of deemed acceptance.

Meaning of Appointed Day

• "Appointed day" means 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.

From the above we can conclude that the payments to the MSME should be made maximum within 45 days and too after a formal written agreement or else within 15 days.

Income tax implications

Amount of Allowance / Disallowance

• If the payment is due for more than 45 days or 15 days as specified but the payment is made before the end of the Financial Year Then in such case the deduction of the expense will be available in the same year itself.
• If the payment is made after 45 days or 15 days as specified, then in that case the deduction will be available in the year in which the payment is made.

Consequences of Amendment to Section 43B

The Micro, Small And Medium Enterprises Development Act, 2006 (MSMED Act, 2006)

• Section 7: Classification of Enterprise
• Revised Classification applicable w.e.f 1st July 2020
• Composite Criteria: Investment in Plant &Machinery/equipment and Annual Turnover

Disclosures For All Companies Only as Per Companies Act, 2013

• As per disclosure requirements and format of financial statements as per Schedule - Il of the Companies Act 2013, every company is required to disclose in their Audited financial statements suppliers / creditors in following categories:
• In Audit Report / Audited Balance Sheet:

Trade Payables shall be bifurcated into:

(A) Total outstanding dues of micro enterprise and small enterprise

(B) Total outstanding dues of creditors other than micro enterprise and small enterprise.

Important Provisions

Section 16: Interest payable by buyer to MSME suppliers

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.

Section 22: Disclosure of un-paid amount with interest to MSME suppliers in annual accounts

Where any buyer is required together is annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts:

(i) Outstanding amount and interest payable which is un-paid to MSME supplier at year end.

(ii) Interest and outstanding amount paid by buyer to MSME supplier during the year.

(iii) Interest due and payable to MSME supplier for outstanding amount which is paid late without interest.

(iv) Interest accrued and remaining unpaid to MSME supplier for the year.

Illustration 1

"A" made a payment to a MSE after the time limit set by section 15 of the MSMED Act, 2006, but within the same financial year in which the expense was incurred.

• In this situation, "A" settled the payment after the specified time limit of Section 15 of MSMED Act, 2006.
• This activates the revised provisions of Section 43B.
• However, as the payment was made within the same financial year in which the expense was accrued, deduction shall be permitted in that financial year as outlined by the regulations of the Income Tax Act, 1961.

Illustration 2

"C" dealt with an MSE where he had expenses that accrued in March 2024. However, he paid the vendor during the subsequent financial year in April 2024, within the deadline specified under Section 15 of the MSMED Act,2006.

• In this situation, C made the payment as per the time limit specified under section 15 of the MSMED Act, 2006.
• In the financial year 2023-2024, C will be able to claim the deduction on an accrual basis.

Illustration 3

"D" incurred an expense in the financial year 2023-2024 that was payable to an MSE. However, he settled it in the subsequent financial year, 2024-25. After the expiration of the time limit specified in Section 15 of the MSMED Act, 2006.

• In this situation, because D made the payment beyond the time limit specified in Section 15 of the MSMED Act,2006, and in the subsequent year, 2024-25.
• D will not be eligible to claim a deduction for that payment in the financial year 2023-2024 when the expenses was initially accrued.

Illustration 4

On March 16, 2024, "E" received an invoice from the MSE (Micro and Small Enterprise) for the supply of goods. "E" dealt with the MSE. The delivery person delivered the goods on the same day. On March 18, 2024, "E" communicated concerns about the quality of the supplied goods to the MSE vendor. Both parties resolved the dispute on April 30, 2024, and E made the payment on May 31, 2024.

• It's important to note that the disputing party raised the invoice dispute within 15 days of the delivery date.
• Therefore, the time limit defined in section 15 of the MSMED Act 2006 starts from the resolution of the dispute.
• "E" can claim a deduction for the payment in the financial year 2023-24. If "E" makes the payment within 45 days from the resolution of the dispute when the expenses accrued.

Illustration 5

"X" ltd. Purchases raw material on credit from "Y" (value of invoice Rs.6,40,000, invoice date & goods acceptance date : 01/02/2024)

"Y" Ltd is a mfg. Company and its investment in P&M is Rs.3.00. crores.

"X" Ltd make payment within 30days (no written agreement is there between "X" & "Y" for payment time) Now, what will be the amount allowable or disallowable as per newly inserted section 43B(h) if "X" Ltd. Has made payment to "Y" Ltd on various dates as below:

• If payment is made on 28/02/2024
• If payment is made on 31/03/2024
• if payment is made on 10/04/2024

Solution

"Y" Ltd. Is a small enterprise as per MSME definition and there is no agreement between "X" Ltd. & "Y" Ltd. Hence, as per provisions of MSMED Act, 2006 payment should be made within 15 days, i.e. payment should be made on or before 16/02/2024. Deduction to "X" Ltd. on various situations will be available as under:

• In above case of payment on 10/04/2024 by "X" Ltd to "Y" Ltd., Invoice of Rs.6,40,000 dated 01/02/2024, is paid by "X" Ltd beyond 15 days from bill date (since there is no agreement between X&Y, payment terms as per MSMED Act shall be 15 days).
• Hence, Rs.6,40,000 will be dis-allowed and added to the taxable income of "X" Ltd. for YF 2023-24 (A.Y. 2024-25) in ITR and "X" Ltd. will have to pay tax on the same. However, the same will be allowed as deduction to "X" Ltd. in YF 2024-25 (AY 2025-26) on payment basis in filling of TIR for FY 2024-25.

Illustration 6

"Z" Ltd. purchases goods on credit from "A" Ltd. (value of Invoice: Rs.11,20,000, Invoice date &goods acceptance date: 02/03/2024).

"A" Ltd. is a mfg. company and is a micro/small enterprise as per MSMED Act, 2006.

As per written agreement between "Z" Ltd. & "A" Ltd. "Z" will make payment on or before 30/04/2024 (i.e. credit period agreed in writing between them is 60 days)

Now, what will be the amount allowable or dis-allowance as per newly inserted section 43B(h) fi "Z" Ltd. has made payment to "A" Ltd on various dates as below :

• - Rs.1,00,000 paid on 30/03/2024
• - Rs.2,00,000 paid on 06/04/2024
• - Rs.4,00,000 paid on 15/04/2024
• - Rs.4,20,000 paid on 06/05/2024

Solution

• "A" Ltd. is micro / small enterprise as per MSMED Act. Date of Invoice is 02/03/2024 &both parties have written agreement for payment terms of 60 days.
• Hence, due date of payment as per MSMED Act, 2006 is 16/04/2024 (i.e. agreed date or 45 days whichever is earlier - as per MSMED Act provisions).

Deduction to "Z" Ltd. on various payments will be available as under:

• In above case of payment on 06/05/2024 by "Z" Ltd to "A" Ltd., payment of Rs.4,20,000 is paid by "Z" Ltd. beyond 45 days from bill date (there is an agreement between "Z" & "A" for payment terms of 60 days credit period, but as per MSMED Act, 2006 in case there is written agreement between buyer &seller for payment, it shall not be more than 45 days. Hence, in above case payment due date is 16/04/2024).
• Hence, Rs.4,20,000 will be dis-allowed and added to the taxable income of "Z" Ltd. for YF 2023-24 (A.Y. 2024-25) in ITR and "Z" Ltd will have to pay tax on the same. However, the same will be allowed as deduction to "Z" Ltd. in YF 2024-25 (AY 2025-26) on payment basis in filling of TIR