income tax

Published on 9 April 2025

Impact of Section 43B(h) on MSME Payments and Compliance Challenges

Introduction

The Punjab Accountants Association has formally reached out to Finance Minister Nirmala Sitharaman to express significant concerns regarding Section 43B(h) of the Income Tax Act and its effects on Micro, Small, and Medium Enterprises (MSMEs). This article offers a fact-checked, comprehensive analysis of this provision, its implications, and recent developments.

Understanding Section 43B(h) and the MSME 45-Day Payment Rule

Section 43B(h) was introduced through the Finance Act of 2023, with an effective date starting from April 1, 2024, applicable for the Assessment Year 2024-25 onward.

Key Provision

  • Payment Timeline: Buyers must remit payments to registered micro and small enterprises for goods or services within the timelines outlined in Section 15 of the MSMED Act:
    • 15 days if no written agreement exists.
    • Up to 45 days if a written agreement is present.

Tax Deduction Implications

  • If payments are not made within the specified time frames, the expense claim is disallowed for that fiscal year and recognized only when payment is actually made.

Objective

The primary aim of Section 43B(h) is to promote timely payments to MSMEs, thereby bolstering their working capital and fostering financial stability.

Who is Included Under This Provision?

Covered Entities

  • All buyers (including companies, firms, individuals, etc.) that procure from registered micro and small enterprises in accordance with the MSMED Act.

Excluded Entities

  • Payments made to medium enterprises or unregistered MSMEs.
  • Traders, unless they hold registration as MSMEs (inclusive of retail and wholesale trade).
  • Section 44AD filers (those engaged in presumptive taxation) are not impacted since they typically do not claim individual expenses.

Industry Concerns and Requests

  • Strict Timelines: The 15/45-day payment requirement poses challenges for many businesses, particularly in sectors with extended credit cycles.
  • Supply Chain Disruption: This provision could deter companies from sourcing from MSMEs, adversely affecting the overall supply chain.
  • Uniformity Issues: Section 43B(h) does not uniformly apply to all taxpayer categories, limiting benefits to only registered micro and small enterprises.
  • Section 44AD Disparity: Businesses operating under presumptive taxation are not affected, raising concerns of perceived inequity.
  • Lack of Amendments: Despite continuous industry representation, the government has not altered or repealed Section 43B(h) as of May 2025.

Practical and Legal Considerations

  • Documentation: Ensure clear proof of MSME registration for all suppliers.
  • Contract Terms: Include explicit payment terms in written agreements to take advantage of the 45-day window.
  • Tax Planning: Adjust payment cycles to circumvent disallowances and potential penalties.
  • GST Implications: If claiming GST input credit, only the principal amount is disallowed under Section 43B(h); otherwise, the total amount is disallowed.

Frequently Asked Questions Regarding Section 43B(h) and MSME Payments

  1. Q: Does Section 43B(h) cover all businesses?

    • A: Yes, it applies to all buyers who purchase from registered micro and small enterprises under the MSMED Act.

  2. Q: Are traders included?

    • A: Only if they are registered as MSMEs, whether in retail or wholesale trade.

  3. Q: How does it affect Section 44AD filers?

    • A: They remain unaffected since their expenses are accounted under the presumptive rate.

  4. Q: Has there been any governmental amendment to Section 43B(h) in the Budget 2024-25?

    • A: No amendments, extensions, or repeals have taken place as of May 20, 2025.

Conclusion

Section 43B(h) of the Income Tax Act represents a significant reform aimed at ensuring timely payments to MSMEs. While it effectively addresses the working capital challenges faced by small businesses, it also introduces compliance difficulties and supply chain challenges for larger enterprises and traders. As of May 2025, industry demands for amendments or extensions remain unfulfilled. Businesses must adapt their payment practices and maintain proper documentation to ensure compliance and prevent tax disallowances.