Understanding Clause (h) of Section 43B: Implications for MSME Payments in 2024

Introduction

Section 43B of the Income Tax Act, 1961 has undergone a significant amendment with the introduction of clause (h), effective from April 1, 2024, and applicable from the Assessment Year 2024-25. This clause requires timely payments to micro and small enterprises (MSMEs) within the specified time limits. It is essential for taxpayers to comprehend the implications of this amendment for compliance with the updated regulations.

Overview of Section 43B

The recent insertion of clause (h) into Section 43B of the Income Tax Act states that a deduction will be allowed only for actual payments made to micro and small enterprises beyond the deadlines established by the Micro, Small and Medium Enterprises Development Act, 2006.

Detailed Provisions of Section 43B

Section 43B: Specific Deductions

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable in respect of:

(a) Any sum payable by the assessee by way of tax, duty, cess, or fee under any law currently in force.
(b) Any sum payable as employer contributions to provident funds, superannuation funds, gratuity funds, or employee welfare funds.
(c) Any sum paid to an employee as a bonus or commission for services rendered.
(d) Any sum payable by the assessee as interest on loans from public financial institutions or akin entities.
(da) Interest on loans from deposit-taking and systemically important non-deposit-taking non-banking financial companies.
(e) Interest on loans or advances from scheduled banks or co-operative banks.
(f) Employer payments for employee leave encashment.
(g) Payments to the Indian Railways for utilizing railway assets.

Following clause (h) is inserted by the Finance Act, 2023, effective April 1, 2024:

(h) Any sum payable 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 be allowed only in the assessment year in which such payment is made, regardless of the earlier accrued liability.

Exemption Clause

Provided that if the amount is paid on or before the due date for filing a return of income as per Section 139(1), then the provisions of this section, except clause (h), do not apply, provided evidence of payment is included with the return.

Definitions Crucial for Clause (h)

Micro and Small Enterprises under MSMED Act, 2006

Micro Enterprise: An enterprise engaged in manufacturing that has investment in plant and machinery not exceeding ₹25 lakhs, or in services, with investment in equipment not exceeding ₹10 lakhs.
Small Enterprise: An enterprise that has investment in plant and machinery exceeding ₹25 lakhs but not exceeding ₹5 crores for manufacturing, and in services exceeding ₹10 lakhs but not exceeding ₹2 crores.

Summary of Criteria

Section Reference	Definition of	Type of Sector	Criteria
7(1)(a)(i)	Micro Enterprise	Manufacturing	Investment in plant and machinery ≤ ₹25 lakhs
7(1)(a)(ii)	Small Enterprise	Manufacturing	Investment in plant and machinery ₹25 lakhs-₹5 crores
7(1)(b)(i)	Micro Enterprise	Services	Investment in equipment ≤ ₹10 lakhs
7(1)(b)(ii)	Small Enterprise	Services	Investment in equipment ₹10 lakhs-₹2 crores

Payment Timelines as per MSMED Act

Section 15: Liability of Buyer

Buyers are obliged to make payments to suppliers either based on written agreements or on specified days, with a maximum period of 45 days from the date of acceptance.

Agreement Exists: Payment must be made by the earlier of:
- As per the written agreement (if any)
- 45 days from acceptance
No Agreement: Payment is due within 15 days of acceptance.

Examples of Payment Scenarios

Agreement Exists:
- Invoice Date: 14-03-2024
- Agreement Payment Terms: 60 days
- Payment Date: 15-05-2024 (62 days post-service).
- Deduction Available for FY 2024-25.
No Agreement:
- Invoice Date: 15-03-2024
- Payment Date: 20-03-2024 (5 days).
- Deduction for FY 2023-24 applicable.
Further Scenarios elaborating different payment timelines reflecting the provisions above.

Conclusion

The introduction of clause (h) in Section 43B of the Income Tax Act, 1961 underscores the necessity for timely payments to MSMEs. Taxpayers must comply with the payment schedules stipulated by the Micro, Small and Medium Enterprises Development Act, 2006 to avoid penalties. Moreover, understanding the definitions and criteria for micro and small enterprises is essential for proper application of these legal provisions.