Timely Payments: Unlocking Growth for MSMEs under Section 43B(h)

Ensure Timely Payments: Empower MSME Growth with Section 43B(h)

Friends, for the last 10-15 days, we have all been talking about or trying to understand one thing, and that is the newly introduced section 43B(h) of the Income Tax Act, 1961, through which MSMEs' payments will not be delayed even for a day. Friends, I will provide you with full information in this blog post, and you may realize that no one has the courage to delay payments to micro-small enterprises, even for a day. Because a delay of just one day would mean that the amount delayed before would incur a 30% penalty imposed by the government. So, friends, this section 43B(h) is a socio-economic welfare measure introduced by the government, aiming to ensure that micro-small enterprises receive their payments promptly.

As we do our accounting, MSMEs know that they operate on an accrual basis. That is, we record expenses when goods are purchased, regardless of whether the payment has been made or not. However, the government has introduced section 43B in the income tax, specifying certain expenses to be accounted for on an actual payment basis. For example, ESIPF and government statutory dues fall under section 43B. It is crucial to understand that actual payment is the basis for these expenses. If these payments are not made by the 31st of March but are paid by the due date for filing the return of income for that particular financial year, they would still be considered paid.

To ensure timely payments to micro and small enterprises, this new clause, h, has been added to section 43B. It's noteworthy that there is no leniency for even a single day's delay. If a payment is delayed beyond the 31st of March and beyond the limit specified in section 15 of the Micro, Small and Medium Enterprise Development Act, it would not be allowed as an expense and would be disallowed.

Now, let's delve into what this 43B(h) entails and when it applies. This amendment is applicable from April 1, 2024, onward, which means the assessment year is 2024-25. So, any transactions falling within this period are subject to these regulations.

You may wonder about MSMEs and who needs to make payments within the specified time period. These clauses do not apply to MSMEs themselves but to those who purchase from micro and small enterprises. Medium enterprises are not covered under this provision.

Micro-enterprises, whether in manufacturing or the service sector, are defined by their investment in plant and machinery or equipment, which is more than 1 crore, and their annual turnover, which is less than 5 crores. Small enterprises, on the other hand, have an investment in plant and machinery or equipment of less than 10 crores and an annual turnover not exceeding 50 crores.

It's important to note that this provision aims to assist micro and small enterprises whose investment is not more than 10 crores in plant and machinery or equipment and whose turnover is not more than 50 crores.

Regarding traders, it's emphasized that they are not categorized as MSMEs. Therefore, if goods are purchased from traders, there is no danger of breaching the 45-day limit.

An office memorandum issued by the Ministry of Micro, Small and Medium Enterprises in July 2021 allows retail and wholesale traders to register on the Udhyam registration portal. However, benefits such as delayed payment relief are only extended to those registered as MSMEs.

Now, let's address the calculation of the 45-day or 15-day payment period. Section 15 of the Micro, Small and Medium Enterprises Development Act prescribes these timelines based on acceptance or deemed acceptance of goods/services, with a maximum of 45 days from that point.

If there is no agreement, an appointment must be made before the appointed day, as per section 2 of the MSMED Act. The appointed date is the day following the expiry of 15 days from the date of acceptance or deemed acceptance of any goods or services.

Furthermore, any objections must be communicated in writing to the buyer, who then has to resolve the issue within 15 days.

It's essential to understand that even if agreements are made under other laws such as the Contract Act, the provisions of the MSMED Act take precedence. Therefore, regardless of any other agreements, payments must adhere to the timelines set forth in the MSMED Act.

The impact of these regulations on large corporations is significant. Failure to comply results in penalties, with the unpaid amount being added to profits, thus subjecting them to higher taxes.

In conclusion, if you are an MSME purchasing from another micro or small enterprise, these regulations apply to you as well. Failure to make payments within the specified time frame will result in a 30% tax imposed by the government on the unpaid amount.