Optimizing MSME Payments: Action Points for Corporates

Understanding the Amendment: The Finance Act 2023 brings significant changes to Section 43B of the Income Tax Act, 1961, affecting corporate dealings with Micro and Small Enterprises (MSMEs).
Timely Payments Mandate: The new clause (h) in Section 43B mandates corporates to make payments to MSMEs within the timelines specified in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
Payment Period: According to Section 15 of the MSMED Act, payments to MSMEs must be made within 45 days from the date of acceptance of goods or services. If there is no agreement, payment should be made within 15 days.
Penal Interest Implication: Section 16 of the MSMED Act states that interest on delayed payments is considered penal and cannot be claimed as an expense under the Income Tax Act 1961.
Disallowed Expenses: If outstanding payments to MSMEs exceed the stipulated period, expenses related to these payments will be disallowed for the relevant year but can be claimed in the year when the payment is made.
Applicability of Section 43B(h): The amendment applies to income computation from the Assessment Year 2024-25 onwards, focusing on payments made in the previous financial year ending March 31, 2024.
Action Points for Corporates:
- Evaluate outstanding creditors, including MSMEs, manufacturers, service providers, and traders, at the year-end.
- Categorize outstanding payments based on the duration, such as below 15 days, between 15 and 45 days, and over 45 days.
- Obtain MSME certificates and agreements from suppliers, clarifying their enterprise classification and turnover.
Compliance and Responsibility: The amendment underscores the importance of timely payments to MSMEs, contributing to their financial stability and fostering a supportive ecosystem for small enterprises.
Corporate Responsibility: Adhering to the amended regulations reflects corporate responsibility and ethical business practices, aligning with the government’s initiative to support and empower MSMEs.
Conclusion: The amendments to Section 43B highlight the need for corporates to reassess their payment protocols towards MSMEs. By implementing the recommended action points and ensuring timely payments, businesses can contribute positively to the growth and sustainability of the MSME sector while complying with regulatory requirements.