Understanding Section 43B(h) of the Income Tax Act: Ensuring Timely Payments to MSMEs

Introduction:

• The Finance Act, 2023, brings significant changes to the tax system with the inclusion of clause (h) in Section 43B of the Income Tax Act, 1961.
• Effective from the Assessment Year (AY) 2024-25, this amendment aims to support Micro, Small, and Medium Enterprises (MSMEs) in India.

Implications of the Amendment:

• The amendment encourages timely payments to MSMEs by disallowing deductions for expenses if payments aren’t made within the specified time limit.
• It motivates larger organizations and taxpayers to fulfill payment obligations promptly, benefiting the overall growth and sustainability of MSMEs.

Key Provisions:

• Under the revised Section 43B, any sum payable to a micro or small enterprise beyond the specified time limit in the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) won’t be allowed as a deduction until the payment is made.
• To be recognized as an MSME, enterprises must meet specific criteria related to investment in plant and machinery and annual turnover.

Payment Timeline According to MSMED Act:

• Section 15 of the MSMED Act stipulates that payments to MSMEs must be made within 45 days from the acceptance date or deemed acceptance. In the absence of an agreement, payment should occur within 15 days from acceptance.
• Buyers can claim deductions in the same financial year if payments to MSMEs are made within 15/45 days, subject to vendor confirmation of MSME registration.

Exceptions and Considerations:

• The disallowance under Section 43B does not apply to certain cases like capital expenditure or when expenses haven’t been claimed.
• It’s not applicable if tax is paid under presumptive taxation or professions making payments to a business.

Conclusion:

• The amendment to Section 43B underscores the importance of financial discipline in dealings with MSMEs.
• Businesses must adapt by ensuring timely payments to MSME vendors, contributing to a healthier economic ecosystem.
• Professional advice is essential for navigating compliance complexities and optimizing tax planning strategies effectively.

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