Section 43Bh of Income Tax Act
Section 43Bh of Income Tax Act The Finance Act of 2023 introduced Section 43B(h), which specifies that any amount owed to Micro and Small enterprises for goods supplied or services rendered can be deducted within the same fiscal year if it is settled within the deadline set by the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006.
This revision seeks to tackle the issue of working capital shortages in the MSME sector and encourage timely payments to micro and small enterprises. The amendment will be applicable for the assessment year 2024–2025 and subsequent years, commencing on April 1, 2024.
MSME Section 43B (h): New MSME 45 Days Payment Rule
The recently incorporated clause (h) under MSME Section 43B stipulates that any amount owed by the assessee to a Micro & Small Enterprise, surpassing the time limit specified in Section 15 of the MSMED Act, will only be permitted as a deduction in the preceding year when the sum is actually settled. This applies regardless of the accounting method utilised.
MSME Turnover Limit
Micro Enterprises are defined as entities with an investment in plant and machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, are those with investments in plant and machinery not exceeding 10 Crores and turnover not exceeding 50 Crores.
Section 43B(h) Applicability
Section 43Bh of Income Tax Act This provision applies when an enterprise purchases goods or utilises services from an enterprise registered under the MSMED Act, 2006. Importantly, the buyer’s registration under the MSMED Act, 2006, is not obligatory. Clause (h) of Section 43B will be enforced starting April 1, 2024.
Section 43B(h) Applicability on Traders
Section 43Bh of Income Tax Act According to Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are eligible for Udyam registration solely for the purpose of Priority Sector Lending. Therefore, Section 43B(h) does not apply to outstanding dues owed to traders as per the MSMED Act’s definition of an enterprise.
Section 43B(h) Effective Date
Clause (h) of Section 43B becomes effective on April 1, 2024. This amendment applies from the assessment year (AY) 2024-25, which corresponds to the Financial Year (FY) 2023-24.
Section 43B(h) Time Limit
Business enterprises are mandated to settle payments to MSMEs within 45 days, as stipulated by Section 15 of the MSMED Act, 2006, contingent upon the existence of a written agreement. If there is no written agreement, payment must be made within 15 days. However, if a written agreement is in place, payment should adhere to the agreed-upon timeline, which should not exceed 45 days.
Consequences for not meeting the payment deadlines to MSMEs
In cases of delayed payment to an MSME, interest is applicable.
Interest Rate: Compound interest at three times the bank rate specified by the Reserve Bank of India (RBI).
Commencement of Interest: Interest accrues from the date stipulated in the agreement or the day immediately following the expiration of the fifteen-day period from the date of acceptance or deemed acceptance of goods or services by the buyer from the supplier (appointed day), whichever is applicable.
Deductibility: This interest cannot be claimed as an expense under the Income-tax Act (ITA), 1961.
Advantages of Clause (h) of Section 43B:
Benefits for MSMEs:
- Streamlined Payment Cycle: Section 43B(h) encourages large companies or entities to settle dues with MSMEs within the prescribed time frame, either 15 days without a written agreement or 45 days with an agreement. Section 43Bh of Income Tax Act This ensures MSMEs receive timely cash flow, crucial for their sustainability and expansion.
- Enhanced Negotiating Power This provision grants MSMEs greater bargaining leverage when discussing payment terms with larger enterprises or entities. They can confidently advocate for deadlines aligned with the specified time frame, knowing there are repercussions for delayed payments.
- Decreased Disputes: Timely payments reduce the likelihood of disputes and legal conflicts stemming from outstanding dues. This saves time and resources for both MSMEs and larger businesses.
Benefits for Larger Enterprises:
- Tax Optimization: By meeting the prescribed timelines, larger enterprises can avail deductions for payments made to MSMEs within the same fiscal year, thereby lowering their tax obligations.
- Regulatory Compliance and Transparency: Adhering to Income-Tax Section 43B(h) fosters transparent financial practices and regulatory compliance, fostering a culture of responsibility in business operations.
- Strengthened MSME Ecosystem: Ensuring prompt payments to MSMEs promotes a thriving MSME ecosystem, which, in turn, benefits larger entities by bolstering their supply chain and facilitating access to various resources.
How to Check MSME Registration Status
To verify MSME registration status and determine the type of enterprise (Micro/Small/Medium), individuals can use the MSME Portal. Simply access the following link:
https://udyamregistration.gov.in/Udyam_Verify.aspx
Sources : https://cleartax.in/s/section-43bh-of-income-tax-act
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