Law Legends


FAQs of Section 43B(h) Amendment: Implications for MSME Payments and Compliance Challenges

"Section 43B: Clause (h) allows deduction for sums payable to micro or small enterprises, linking it to actual payment beyond MSME Act's time limit, diverging from the general accrual basis allowed for other year-end outstanding payments under the section."

System of Accounting:

The Income-tax Act allows deductions based on the accounting method followed by the assessee.

  • Cash system of accounting: Deductions are allowed on an actual payment basis.
  • Mercantile system of accounting: Deductions are allowed on an accrual basis.

Section 43B:

Section 43B provides a list of specified expenses for which deductions are allowed on a payment basis, even for those following the mercantile method of accounting.

Deductions are generally allowed if payment is made on or before the due date of furnishing the return of income.

Addition of Clause (h):

The Finance Act 2023 added clause (h) to Section 43B.

Clause (h) relates to any sum payable to a micro or small enterprise (MSE) beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act).

Deduction for MSMEs:

The deduction for payments to MSEs under Section 43B(h) is allowed on a payment basis. The payment should be made beyond the time limit specified in Section 15 of the MSMED Act.

Classified as micro and small enterprises

Category of Enterprise Criteria for Classification Applicability of Section 43B(h) for Trade Payable
Micro Enterprise Net investment in plant and machinery or equipment ≤ Rs 1 crore.- Net turnover does not exceed Rs 5 crores. YES
Small Enterprise Net investment in plant and machinery or equipment ≤ Rs 10 crore.

Net turnover does not exceed Rs 50 crores.

Medium Enterprise - Net investment in plant and machinery or equipment ≤ Rs 50 crore Net turnover does not exceed Rs 250 crores. No

FAQ 1- What is the Timeframe under Section 15 of the MSMED Act for completing payments

Section 43B(h) Reference Time Limit under Section 15 of MSMED Act
Buyer's Payment Obligation The buyer, as per the agreement in writing with the supplier, must make payment for supplied goods or services on or before the agreed-upon date, not exceeding 45 days.
If no agreement exists, payment must be made before the "appointed day."
Definition - Appointed Day "Appointed day" is defined in Section 2(b) of the MSMED Act as the day immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of goods or services by a buyer from a supplier.

FAQ – Whether invoice or purchase order be treated as an agreement ?

  • The MSMED Act lacks a specific definition for the term 'agreement,' implying its inclusivity of both written and oral forms.
  • Commonly understood, an agreement involves one party making an offer and another party agreeing to it.
  • Typical agreement components encompass due dates, acceptance terms for goods/services, consequences for late payment, and provisions for dispute resolution.
  • Documents such as invoices or purchase orders, containing these essential details, can be regarded as forming an agreement under the MSMED Act.

FAQ –Does the disallowance extend to amounts payable to retail traders or wholesalers?

As per government memoranda, Retail and Wholesale trade MSMEs can register on Udyam Registration Portal, but benefits are restricted to Priority Sector Lending only. According to the Office Memorandum dated 01.09.2021, such MSMEs, labeled as traders in Udyam Certificate, are not recognized as "Suppliers" for Section 15 and Section 43B(h), excluding certain benefits, including delayed payment provisions.

FAQ - Does the disallowance under Section 43B(h) extend to the GST component?

  • Disallowance under Section 43B(h) for sums payable to Micro or Small Enterprises, including GST, is limited to the amount excluding GST when claimed as Input Tax Credit (ITC) in the books.
  • If the buyer opts not to claim ITC under GST and treats it as an expense, deduction against GST will be allowed based on actual payment.

FAQ - Are the provisions of Section 43B(h) applicable to non-registered suppliers?

  • Udyam Registration for MSMEs is optional as indicated by the term "may" in the notification; no mandatory requirement to upload documents.
  • Section 43B(h) refers to Section 15 of MSMED Act, requiring Udyam Registration for the supplier's classification as a micro or small enterprise.
  • Without Udyam Registration, Section 15 of MSMED Act may not be invoked for disallowance under Section 43B of the IT Act.

FAQ -Will the disallowance under Section 43B be enforced for supplies made prior to obtaining Udyam registration?

 No, Section 43B(h) does not apply to payments related to supplies made before the Udyam Registration date. The entity is considered a micro-enterprise only from the registration date, as Udyam Registration does not have retrospective implications.

FAQ - Is Section 43B(h) applicable to outstanding amounts related to the acquisition of Capital Goods?

  • Section 43B differs from Section 37(1) by not linking deductibility to the capital vs. revenue expenditure distinction.
  • Section 43B applies to payable sums eligible for deduction under the Income Tax Act.
  • Section 43B(h) is applicable to amounts owed to micro or small enterprises for the purchase of capital goods, allowing for 100% deductions under Sections 30 to 36.
  • Disallowance under Section 43B(h) doesn't extend to depreciation if a 100% deduction for capital expenditure isn't permissible, as depreciation is not a sum payable for which deduction is otherwise allowable.

FAQ What if the cheque is handed over on or before the due date, but it is realised after the due date?

In accordance with established commercial practices, if a cheque is given to the payee and doesn't bounce afterward, the payment is considered made on the date of cheque handover. Consequently, such transactions should be treated as meeting the payment deadline.

FAQ - What steps can be taken to authenticate the authenticity of the Udyam Number provided by the supplier, whether it's printed on the invoice or presented in another manner?

Search his Udyam Registration Number on the Udyam Portal under the newly enabled “Verify Udyam Registration Number” at the following link: https://udyamregistration.

FAQ - Can one obtain the Udyam Registration details of a supplier by searching for their name or PAN on the Udyam portal?

No. if one knows his Udyam Registration Number he can check status..

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