MSME Section 43B (h): New MSME 45 Days Payment Rule.
The newly added clause (h) states that any sum payable by the assessee to a MSME beyond the time limit set in Section 15 of the MSMED Act, 2006, is eligible for deduction.
This deduction is applicable in the previous year when the sum is actually paid. Clause (h) of Section 45B essentially states that any sum payable by a larger enterprise or entity to a registered MSME beyond the stipulated deadlines won’t be considered a deductible expense in the year the liability was incurred.
Section 43B (h) Applicability
This clause is applicable when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006, is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2024.
Section 43B (h) Applicability on Traders
As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.
Section 43B (h) Effective Date
The applicability of clause (h) of Section 43B is from April 1, 2024. This amendment is made applicable from assessment year (AY) 2024-25, that is, Financial Year (FY) 2023-24.
Section 43B (h) Time Limit
Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
Penalties for Failure to Pay MSMEs Within the Time Frame
In the case of late payment to an MSME, interest is applicable.
Rate of interest: Compound interest at the times of the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is payable: Appointed day or the date as per the agreement, as the case may be.
Deduction of this interest is not allowed as an expense, as per the Income-Tax Act (ITA), 1961.
Benefits of Clause (h) of Section 43B
Benefits for MSMEs:
Smooth Payment Cycle: MSME Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is 15 days without a written agreement and 45 days with an agreement. This way, MSMEs are assured of timely cash flow, which is essential for their sustainability and growth.
Better Bargaining Power: The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities. It is possible for them to confidently push for deadlines aligned with the stipulated time frame, as they remain assured of consequences in case of delayed payments.
Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues, are minimised. Thus saving time and resources for both MSMEs and larger businesses alike.
Benefits for MSMEs:
Tax Planning: While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities.
Compliance and Transparency: Income-Tax Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
Strong MSME Ecosystem: Ensuring prompt payments to MSMEs provides a fillip to a robust MSME ecosystem.