Vayana Explains Section 43B (h): Ensure Timely Payments for MSMEs

MSMEs are the growth engine of India. That’s a given. But, a longstanding challenge for MSMEs has been delayed payments from mid and large enterprises. This can significantly impact their cash flow and hinder their ability to operate effectively, especially during volatile times.

Fortunately, the Finance Act of 2023 introduced a positive change for MSMEs through the introduction of Section 43B (h) of the Income Tax Act. Let’s delve deeper into this provision and understand its implications for both MSMEs and Enterprises.

Defining MSME Categories: Investment and Turnover Thresholds

The classification of these enterprises is based on their investment in plant and machinery for manufacturing units or equipment for service sectors, alongside their annual turnover. Specifically, Micro Enterprises are characterized by an investment of up to one crore rupees and a turnover not exceeding five crore rupees. Small Enterprises, on the other hand, are defined by an investment limit of ten crore rupees and a turnover cap of fifty crore rupees. Lastly, Medium Enterprises are those whose investment does not exceed fifty crore rupees, with a turnover limit of two hundred and fifty crore rupees.

What is Section 43B (h)?

Section 43B (h) essentially deals with tax deductions for payments made to MSMEs. Previously, companies could claim tax deductions for expenses incurred (accrual basis) even if the payment to the MSME supplier was delayed. This created a situation where MSMEs faced cash flow issues due to delayed payments.

Section 43B (h) changes this dynamic. It states that any amount payable to a micro and small enterprise for goods supplied or services rendered can only be claimed as a tax deduction in the year the payment is actually made, provided it is made within the time limit of 45 days specified under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

Exclusions from Applicability

Section 43B(h) does not apply uniformly across all businesses. Key exclusions are as under:

  1. Engagements involving medium enterprises, despite their classification under the broader MSME umbrella, do not fall under the purview of Section 43B(h).
  2. Financial transactions such as loans or advances between companies, even if they involve MSMEs, are not covered under this section.
  3. Transactions that are not commercial in nature, i.e., personal purchases or non-business-related dealings.
  4. Specific sectors or types of transactions might be exempt based on regulatory guidelines or amendments to the tax laws, which may need regular updates and consultations with tax professionals to ensure compliance.

Key Points about Section 43B (h):

  • Effective Date: This provision applies to Assessment Year 2024-25 onwards (financial year starting April 1, 2024).
  • Time Limits for Payments: As per the MSMED Act, payments to MSMEs must be made:
    • Within 15 days if there is no written agreement on payment terms.
    • Within 45 days if a written agreement exists between the buyer (mid or large companies) and the MSME supplier.
  • Delayed Payments: If the payment is delayed beyond the stipulated time frame, the deduction can only be claimed in the year of actual payment.

Consider a scenario where Enterprise A (Corporate) purchases office supplies worth ₹1,00,000 from Micro Enterprise B (The MSE). There’s no written agreement between Enterprise A and Company B on the payment terms. Under Section 15 of the MSMED Act, Enterprise A must pay Company B within 15 days of receiving the supplies. If Enterprise A fails to do so, the ₹100,000 expense won’t be deductible for Enterprise A in the current financial year. However, the deduction will only be allowed in the year Enterprise A pays the dues to Company B. This incentivizes Enterprise A to settle the payment within 15 days to claim the deduction in the desired year for tax purposes.

Benefits of Section 43B (h) for MSMEs:

  • Improved Cash Flow: Timely payments ensure a steady inflow of funds, which is critical for MSME operations and growth.
  • Stronger Bargaining Power: This provision strengthens the negotiating position of MSMEs when dealing with Enterprises regarding payment terms.
  • Reduced Disputes: Timely payments minimize the chances of disputes arising from delayed dues.
  • More Business: MSEs can now focus on churning more business, without worrying about timely receivables and focus on business growth.

Implications for Mid & Large Enterprises:

  • Importance of Timely Payments: Enterprises need to prioritize timely payments to MSMEs to avail tax deductions in the intended financial year.
  • Reviewing Payment Terms: Re-evaluating and potentially revising payment cycles to comply with MSMED Act guidelines might be necessary.
  • Non-Compliance Risk: Failure to comply with this regulation will imply forfeited tax deductions and compounded interest on the overdue amount.

Vayana, your Partner in Streamlining Trade Finance

Vayana – India’s Largest Trade Credit Infrastructure, is committed to empowering MSMEs. We offer robust Trade Finance Solutions that verifies credit worthy suppliers in your supply chain and then facilitates secure and timely payments, enabling MSMEs stay on track, through advanced APIs.  Our solutions ensure timely and affordable credit access, regulatory compliance, smooth cash flow management, and enhanced commerce.

Section 43B (h) is a welcome step towards ensuring timely payments for small businesses. By understanding this provision and its implications, both MSMEs and Enterprises can navigate the financial shift directed toward inclusive growth.

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