Explore the Finance Act 2023’s amendment to Section 43B of the Income Tax Act, focusing on prompt payments to Micro and Small Enterprises (MSMEs). Understand the new clause (h), its implications, and the importance of adhering to payment deadlines for business prosperity.
The Government of India has been proactive in fostering the growth of Micro and Small Enterprises (MSMEs), as evident in the Finance Act 2023. This Act introduces clause (h) in section 43 of the Income Tax Act 1961, emphasizing the significance of timely payments to MSMEs for ensuring their continuous access to working capital. This blog aims to dissect the recent amendments to section 43B of the income tax act, shedding light on its impact on expense disallowance and the crucial role of punctual payments.
Understanding Section 43B of the Income Tax Act:
Section 43B forms a crucial part of tax provisions, governing the disallowance of expenses related to business income in India. It mandates deductions only on actual payments made by the assessee, with various sub-clauses covering taxes, PF contributions, interest, or loan borrowings. Such regulatory frameworks promote a conducive business environment in the country.
Introduction of Clause (h) in Section 43B:
Clause (h) is a recent addition to section 43B, aimed at curbing delayed payments to micro and small enterprises through the disallowance of expenses. According to this clause, any sum payable by the assessee 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 face disallowance. Effective from April 1, 2023, this amendment underscores the government’s ethical commitment to bolstering India’s micro and small enterprises.
Threshold for Micro and Small Enterprises:
Micro and small enterprises are defined based on investment in plant and machinery and annual turnover. A micro enterprise is one with an investment not exceeding 1 crore rupees and an annual turnover below 5 crore rupees, while a small enterprise falls within an investment of 10 crore rupees and an annual turnover of up to 50 crore rupees.
Role of Section 15 of MSMED Act 2006:
Section 15 of the MSMED Act mandates the timely payment by buyers to MSME suppliers, setting ideal payment timeframes. Despite this provision, ensuring prompt payments remained a challenge, necessitating the amendment of section 43B(h) to address the issue.
Applicability of Section 43B (h) of Income Tax Act:
Section 43B(h) allows deductions only if certain criteria are met, including payment to a supplier, registration on the Udyam portal, and classification as a manufacturer or service provider falling under the micro or small enterprise category. The provision, effective from April 1, 2023, has specific implications regarding the timeline of payments for expense deductions.
Deductions Allowance under Section 43B:
This section permits deductions solely on an actual payment basis, highlighting the importance of timely payments to MSME suppliers. Adherence to the 45-day payment timeline, as stipulated in section 15, is crucial for availing deductions, emphasizing the practical aspect of financial transactions between businesses.
Expenses Disallowed under Section 43B:
Section 43B disallows various expenses, including interest payable on loans and advances, in case of delayed payments. This underscores the significance of prompt payments to avoid the disallowance of income tax deductions.
Income Tax Mandates on Delayed Payments to MSMEs:
The recent amendment reinforces the government’s commitment to creating a conducive environment for MSMEs by penalizing delayed payments through expense disallowance. Such mandates serve as a negative reinforcement for payers, encouraging adherence to payment timelines specified in section 15 of the MSMED Act.
Significance of Timely Payments to MSMEs:
Timely payments play a crucial role in enhancing the financial stability, economic growth, and viability of micro and small enterprises. Additionally, they foster entrepreneurship and build stronger vendor-supplier relationships, contributing to overall business prosperity.
Conclusion:
The introduction of subsection (h) in section 43B of the Income Tax Act signifies a significant step towards empowering MSMEs through timely payments. This amendment addresses common payment issues faced by these enterprises, providing them with income tax deductions for adhering to payment schedules. As a result, MSME registration in India is witnessing a surge, indicative of the positive impact of government initiatives on business growth. For further insights, consult experts at Ark Advisors LLP.