The Finance Act of 2023 has introduced a pivotal amendment to the Income Tax Act, specifically through the addition of Section 43B(h). This legislation mandates that payments owed by businesses to Micro and Small Enterprises (MSEs) for goods supplied or services rendered can be deducted within the same fiscal year, provided these payments are made within the time frame set by the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. Aimed at alleviating the working capital constraints faced by MSEs, this change promotes timely payments and enhances liquidity within the MSE sector. Effective from April 1, 2024, it applies to the assessment year 2024-2025 and onwards.
Detailed Insights on MSME 45 Days Payment Rule
The essence of Section 43B(h) lies in its reinforcement of the 45-day payment rule, as outlined in the MSMED Act. It states that any overdue payments to MSEs beyond the stipulated 45-day window will only qualify for tax deductions in the financial year they are actually settled. This adjustment in the tax code is significant, encouraging businesses to prioritize and streamline their payment processes to MSEs.
MSE Turnover and Investment Criteria
To fall under the purview of this section, Micro Enterprises are defined as entities with investments in plant and machinery up to INR 1 Crore and an annual turnover of up to INR 5 Crores. Small Enterprises are categorized by an investment limit of up to INR 10 Crores and a turnover threshold of up to INR 50 Crores.
Who Does Section 43B(h) Apply To?
This legislative update is relevant for any enterprise engaging in transactions with MSEs registered under the MSMED Act, 2006. Noteworthy is that the buyer’s registration under the MSMED Act is not a prerequisite for the applicability of Section 43B(h).
Clarifications on Applicability to Traders
Based on the memorandum issued on July 2, 2021, wholesale and retail traders qualify for Udyam registration solely for Priority Sector Lending advantages. Consequently, Section 43B(h) does not extend to dues owed to traders, aligning with the MSMED Act’s definition of an enterprise.
Compliance, Penalties, and Benefits
Failing to adhere to the 45-day payment guideline results in compounded interest charges at thrice the bank rate published by the Reserve Bank of India (RBI) from the due date. While this strengthens the financial stability of MSEs by ensuring they receive payments timely, it prompts larger entities to maintain diligent payment schedules to avoid tax liabilities and interest penalties. Moreover, compliance with Section 43B(h) fosters a transparent and robust MSE ecosystem, beneficial for the overall economy.
Ensuring Compliance and Verifying MSE Registration
Businesses must incorporate effective tracking and documentation strategies to ensure adherence to Section 43B(h). Verifying an MSE’s registration status is straightforward via the Udyam Registration portal, an essential step for due diligence and compliance.
FAQs on Section 43B(h)
This section provides clarity on common inquiries related to the implementation, scope, and compliance requirements of Section 43B(h), ensuring businesses and MSEs alike understand the nuances and obligations introduced by this amendment.