Updated on: Apr 10th, 2024
|
16 min read
The Finance Act 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro and Small enterprises for goods supplied or services given may be deducted in the same year if it is paid within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
This amendment aims to address the issue of working capital scarcity in the MSME industry and promote prompt payments to micro and small businesses. The assessment year 2024–2025 and any following years will be covered by this change, which will come into effect on April 1, 2024.
The newly added clause (h) states that any sum payable by the assessee to a Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed).
Micro and Small Enterprises are classified on the following basis:
Micro Enterprises, means an entity having an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, should have an investment in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores.
This clause is applicable when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006, is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2024.
As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.
Clause (h) of Section 43B is applicable from April 1, 2024. This amendment is made applicable from assessment year (AY) 2024-25, that is, Financial Year (FY) 2023-24.
Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In case there is no written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
Sr. No. | Day of acceptance of any goods or services by a buyer from a supplier | Credit period (Days) | Due Date as per MSME ACT
| Actual date of payment | Deduction allowed in which FY |
1 | 29/03/2024 | 60 | 13/05/2024 | 25/05/2024 | FY 2024-25 |
2 | 01/04/2024 | 45 | 16/05/2024 | 21/05/2024 | FY 2024-25 |
3 | 31/01/2024 | 15 | 15/02/2024 | 20/02/2024 | FY 2023-24 |
4 | 11/09/2023 | 20 | 01/02/2023 | 03/10/2023 | FY 2023-24 |
5 | 30/11/2023 | 30 | 30/12/2023 | 20/12/2023 | FY 2023-24 |
6 | 21/04/2024 | 40 | 31/05/2024 | 20/06/2024 | FY 2024-25 |
7 | 15/12/2023 | – | 30/12/2023 | 05/04/2024 | FY 2024-25 |
8 | 10/11/2023 | – | 25/11/2023 | 30/11/2023 | FY 2023-24 |
In the case of late payment to an MSME, interest is applicable.
Rate of interest: Compound interest at the 3 times the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is payable: The date as per the agreement or the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier (appointed day), as the case may be.
Deduction of this interest is not allowed as an expense, as per the Income-tax Act (ITA), 1961.
Benefits for MSMEs:
Benefits for Larger Enterprises:
Through the MSME Portal, one can verify MSME registration and the type of enterprise (Micro/Small/Medium) by the registration number using the following link:
The Finance Act 2023 introduces Section 43B(h) ensuring timely payment and tax deductions for sums owed to Micro and Small enterprises. It covers payment rules, MSME classification, applicability to traders, effective date, penalties for late payment, benefits for both MSMEs and larger enterprises, and how to check MSME registration status.