New Clause (h) of Section 43B of Income Tax Act: Implications for Businesses and Micro, Small and Medium Enterprises (MSMEs)

20-Feb-2024

A new clause (h) has been inserted in Section 43B of the Income Tax Act, 1961, with effect from April 1, 2024. This amendment aims to ensure timely payments to Micro, Small and Medium Enterprises (MSMEs) by linking deductions for business expenses with payment timelines for goods and services received from registered MSMEs.

Key provisions of clause (h):

Any sum payable by an assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, will not be allowed as a deduction in the assessee's income tax return for the year in which the liability to pay such sum arose.
The deduction will be allowed only in the previous year in which the payment is actually made to the MSME.
The time limit for payment specified in Section 15 of the MSMED Act is 15 days from the day of acceptance or the day of deemed acceptance of the goods or services by the buyer, or 45 days if there is a written agreement between the buyer and the supplier specifying a longer period.

Implications for businesses:

Businesses need to ensure timely payments to registered MSMEs to claim the full deduction for business expenses in the current financial year.
Late payments will result in deferral of the deduction to the year in which the payment is made, potentially impacting the business's tax liability.
Businesses may need to review their procurement processes and payment terms to ensure compliance with the new provision.

Implications for MSMEs:

MSMEs can expect to receive payments faster from their buyers, improving their cash flow and financial stability.
The new provision may strengthen the bargaining power of MSMEs in negotiations with buyers.
MSMEs need to register with the government to avail the benefits of this provision.

Overall, the new clause (h) of Section 43B is a positive step towards ensuring timely payments to MSMEs. This will improve the financial health of MSMEs and contribute to the growth of the MSME sector in India.