Impact of Section 43B(h) on MSME Expense Deductions in 2024

Introduction

Starting April 1, 2024 (AY 2024-25), significant amendments under Section 43B(h) of the Income Tax Act will affect how expenses related to purchases or services from Micro and Small Enterprises (MSMEs) are treated. This article details the implications of these changes, including payment timelines and the relationship with Sections 15, 16, and 2(b) of the MSME Act.

Key Changes under Section 43B(h)

As of April 1, 2024, per Section 43B(h) of the Income Tax Act, expenses for purchases or services from MSMEs will only qualify for deduction if the payment is made within the specified timeframes outlined in the MSME Act.

Payment Guidelines under the MSME Act

• Section 15 of the MSME Act mandates that buyers must make payments for goods or services on or before the agreed date, or in the absence of an agreement, before the "appointed day."
• The “appointed day,” defined in Section 2(b), is the day following the expiration of fifteen days from the acceptance of goods or services.

Key Definitions:

1. Day of Acceptance:

   • The date when goods are delivered or services rendered.
   • If the buyer raises a written objection concerning acceptance within fifteen days, the day when the issue is resolved.

2. Day of Deemed Acceptance:

   • If no objections are raised within fifteen days, it is the day of actual delivery.

Conclusion from Payment Guidelines: Payments to MSMEs must be completed within a maximum of 45 days post-acceptance, following a formal written agreement, or within 15 days if no agreement exists.

Record Keeping for Compliance

Each taxpayer should maintain an up-to-date list or database of all vendors to assess payables as of March 31, 2024. This is essential for calculating potential disallowances under Section 43B of the Income Tax Act. It is crucial to note that this disallowance calculation must be performed even for cases not audited for tax purposes, as the Assessing Officer may question these expenses during scrutiny.

Allowance and Disallowance Scenarios

1. Payment made before end of Financial Year:

   • If payment is settled after 45 or 15 days but before the financial year's end, the expense will be deductible in that same year.

2. Payment made after stipulated time:

   • If payment occurs after the 45 or 15-day mark, the deduction will only be permitted in the year the payment is made.

Conclusion

In order to facilitate timely deductions and manage tax liabilities effectively, it is crucial to comply with the requirements set forth in both the Income Tax Act, 1961, and the MSME Act, 2006. Ensure that all payments are made within the stipulated timelines to avoid disallowances and maximize eligible deductions.