Introduction of clause (h) in section 43B of Income Tax Act

The Government of India has been taking constant initiatives to promote the growth of Micro and Small enterprises (MSMEs). A step further in that direction is through the Finance Act 2023. The Act provides for the introduction of clause (h) in section 43 of the Income Tax Act 1961. The initiative promotes the importance of timely payments to micro and small enterprises, realizing their constant need for working capital. Hence, the insertion of clause (h) through amendment in section 43B of income tax act to promote MSME Registration. Introduction of this new clause is not just important for growth, it also shows the ethical move towards promotion of the micro and small enterprises of India. So, as a taxpayer (assessee) it is vital for you to understand the section 43b of income tax act amendment.

We’re here to help you understand to this new clause (h). Through this blog we will delve into the recent amendments to section 43B of income tax act along with its impact on the disallowance of expenses, and importance of timely payments. 

Understanding section 43B of Income Tax Act

Section 43B comes under the wide ambit of provisions related to taxation and expenses disallowance on the income generated from business or trade in India. Whereas, section 43B specifically covers certain deductions that on actual payments basis. With many sub – clauses therein covering Tax, contributions to PF, interest or loan borrowings. Hence, this section allows certain tax deductions to an assessee only if they fulfill certain conditions and make payment in that year. Regulatory frameworks like these promote a healthy working environment in the nation. 

New Clause (h) in section 43B 

To promote the economic growth and wellness of micro and small entities specifically, the clause (h) was introduced in section 43 b to avoid delayed payments through disallowance of expenses. To quote the clause as per the Act: 

“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 (27 of 2006)”

This clause shall be effective from 1st April 2023. Hence, you can use its benefits from assessment year 2024-25. 

Threshold for micro and small enterprise

We’ve seen until now that the expense under section 43B of Income Tax Act and disallowance works out in the favor of micro and small enterprises. These enterprises refer to a few types of companies in India that fall within a certain threshold. The threshold for micro and small enterprises is: 

What is a micro enterprise?

A micro enterprise is a company with an investment in plant and machinery not more than 1 crore rupees and annual turnover does not exceed 5 Crore Rupees. 

What is a small enterprise? 

A small enterprise is a company with an investment in plant and machinery not more than 10 Crore Rupees and annual turnover does not exceed 50 Crore Rupees. 

Also Read: What is the definition of small company in Companies Act 2013?

Role of Section 15 of MSMED Act 2006

The Section 15 of Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) signifies the liability of buyers to make payments to the MSME suppliers. The section 15 stipulates the ideal payment timeframe to be within 45 days in the absence of a mutually entered written Vendor’s Agreement. Moreover, if there is no agreement in writing, the ideal period for payment is presecribed as 15 days.

Even with the cushion of this provision as one of the prominent benefits of MSME registration, there were issues with ensuring timely payments to MSME suppliers. Thus leading to the amendment of section 43B(h). 

Applicability of Section 43B (h) of Income Tax Act

After a brief reading of the new clause h of section 43 B, let’s also understand it’s applicability once. Simply put, the provision allows deductions if you match the following criteria:

• For an amount payable to a supplier;
• Having udyam portal registration;
• Registered as a manufacturer or service provider (not a trader); and
• Falling under either Micro or small enterprise.

From the above conditions its clear that deduction on timely payment is also only available if you fall in the category. To avail the alllowance under section 43B (h) you must not be a registered as a trader and/or a medium enterprise on the udyam portal. Besides, as stated above, the provision shall be applicable from 1st April 2023. Hence, it will have to following effects:

• Section 43B (h) is not applicable for amount payable on invoices before 31/03/2023;
• If the invoices ranging from 1/04/2023 to 15/02/2024 are paid before 31/03/2024, Expense Deduction is allowed in FY 2023-24;
• If invoices from 16/02/2024 to 31/03/2024, are paid within 45 days, they get deduction for FY 2023-24; and
• Deductions are only applicable for the year in which you make the actual payments.

Deductions allowance under section 43B of Income Tax Act

The section 43B only allows deductions when an actual payment basis. Additionally, the recent amendments make it even more prominent in ensuring timely payments to MSME suppliers. Since the stipulated time is 45 days as per section 15. The timely payment framework is also based on that foundation. Hence, deductions to assesses are only allowed if the payments to MSME suppliers are made within 45 days or as mutually agreed in writing. This gives a more practical outlook on how the financial transactions between two businesses take place. 

Expenses disallowed under section 43B of Income Tax Act

As seen above, the scope of section 43B of the income tax act is wide and covers a lot of various expenses. This includes the interest payable on loans and advances. So, with the recent amendment if interest is not paid timely, its expense is disallowed. This, in turn, underscores the importance of timely payments of interests. Moreover, the prominent significance of this is avoiding the disallowance of income tax deductions. 

Income tax mandates on delayed payments to MSMEs

The recent amendment shows the dedication of the government to create a secure and growth centric environment for the micro and small enterprises. As a result, the income tax act reinforces the need for timely payments to these MSMEs. It puts a negative reinforcement on the payers for delayed payments by disallowing the expenses from deductions. The payment is considered to be delayed when it remains pending beyond the due dates conferred within section 15 of the MSME Act. 

Also Read: MSME Registration Process

Significance of timely payments to micro and small enterprises

Micro and small entities in India cover a large ratio of businesses in India. Hence, the government takes active measures to promote the wellness and economic growth of these entities. Timely payments under section 43b of the income tax act help MSME suppliers in achieving this growth with ease. Let’s see the significance of timely payments in varied aspects:

• Financial stability and economic growth;
• Management of working capital;
• Viability of business;
• Encouraging entrepreneurship; and
• Build better vendor supplier relations. 

Conclusion

Delay in payments were a common issue for micro and small enterprises in india. To curb this, the government introduced subsection (h) in section 43b of the Income Tax Act. This action streamlines the payment issues faced and helps vendors get deductions on income tax, if they make timely payments. This is one of the reasons why MSME registration in India is becoming popular by the day. You can learn more from LegalWiz.in experts.