With an endeavour to enhance the liquidity of MSMEs, the Government is attempting to regulate the payments to MSMEs. The MSMED Act1 provides protection to MSMEs against delayed payment by granting them ability to charge interest on delayed payments at three times bank rate and also disallowance of such interest expense under Income-tax law. The Companies Act also mandates companies to report unpaid principal dues to MSMEs and make disclosure of interest payable on such delayed dues
Amendment under Income-tax Act, 1961
In order to promote timely payment to micro and small enterprises, the Finance Act, 2023 inserted clause (h) under S. 43B of the Income-tax Act, 1961 (“ITA”) to provide that any sum payable to a micro or small enterprise beyond the time limit specified in S. 15 of the MSMED Act shall be allowed in the year when such sum is actually paid.
Frequently Asked Questions on S. 43B(h) of ITA
1. The provisions of S. 43B(h) are applicable from which financial year
S. 43B(h) is inserted by Finance Act 2023 w.e.f. April 1, 2024 and accordingly the provisions apply from FY 2023-24 (AY 2024-25) onwards.
2. Whether S. 43B(h) applies to outstanding dues as on March 31, 2023?S. 43B(h) provides for deduction on actual payment basis with respect to “a deduction otherwise allowable under this Act”. Impliedly, S. 43B(h) would be attracted if deduction is otherwise claimable in FY 2023-24 or subsequent years. In case of outstanding dues as on March 31, 2023, typically, deduction would have already been claimed in earlier years and thus, the question of claiming deduction on payment basis would not arise.
3. The provisions of S. 43B(h) are applicable to which class of enterprises?
MSMED Act classifies enterprises into Micro, Small and
Medium enterprises. However, S. 43B(h) covers
only micro and small enterprises (“MSEs").
4. What is the time limit specified under S. 15 of the MSMED Act within which payment is to be made to the MSEs?
As per S. 15 of MSMED Act, where any supplier2 supplies any goods or renders any services to any buyer3, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day.
However, in no case the period agreed upon between the supplier and the buyer in writing
shall exceed 45 days from the day of acceptance or the day of deemed acceptance.
The term “appointed day” is defined under S. 2(b) of MSMED Act to mean the day following immediately after the expiry of 15 days from the day of acceptance or day of deemed acceptance.
The term ‘Day of Acceptance’ means – within 15 days from the day of delivery of goods or rendering of services,
To summarise, the specified time limit u/s 15
is as under:
The question can be answered by way of illustrations as tabulated below:
6. What would be the tax implications u/s 43B(h) in the hands of the buyer, if payment is made after the specified time limit under S. 15 of MSMED Act but before the end of FY?
As per S. 43B(h), any sum payable to MSE would be allowed as a deduction in the previous year in which the sum is actually paid. Accordingly, if the dues are paid on or before the end of FY, no disallowance under S. 43B(h) would be attracted, despite of delayed payment.
7. What would be the tax implications u/s 43B(h) in the hands of the buyer, if the payment is made after the specified time limit under S. 15 of MSMED Act but before the due date of filing of return of income for that FY?
The proviso to S. 43B allows deduction if the payment is made till the due date of filing return of income under S. 139(1). However, the said relaxation is not extended to S. 43B(h). Accordingly, if the delayed payment is made in the subsequent FY, the same would be allowed as deduction only in the next FY.
8. What if payment is made in the immediately subsequent FY but within the time limit stipulated under S. 15 of the MSMED Act?
S. 43B(h) is attracted where any sum is payable to a MSE “beyond the time limit” specified in S. 15 of the MSMED Act. In the instant case, if the payment is made within the stipulated time limit, S. 43B(h) itself would not get attracted and thereby, no disallowance is warranted, despite of payment being made in the subsequent year.
9. In case the payment is made beyond the time limit specified under S. 15 of MSMED Act, but if the specified time limit ends in the immediately next financial year, can one claim that S. 43B(h) is not applicable?
The rationale behind S. 43B(h) as explained in the Explanatory Notes to Finance Act, 2023 is that “this amendment to section 43B of the Act allows the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.”
10. Illustrations to determine the specified time limit under S. 15 of MSMED Act and year in which the payment is allowable:
A. If no written agreement exists:
B. If written agreement exists:
11. Whether interest paid / payable to MSEs on delayed payments would be allowable as a deduction under ITA?
S. 23 of the MSMED Act provides that “Notwithstanding anything contained in the Income-tax Act, 1961……”, interest payable or paid by buyer on delayed payments in accordance with the MSMED Act, shall not be allowed as a deduction in computing total income under the ITA.
12. Whether disallowance u/s 43B(h) can be made where an entity falls within the criteria laid down for micro or small enterprise, but has not filed Udyam Registration?
S. 43B(h) triggers where any sum is payable to a micro or small enterprise. As per Explanation 4 to S. 43B, the terms “micro enterprise” and “small enterprise” shall have the meaning assigned under the MSMED Act. The classification of micro and small enterprise under the MSMED Act5, per se does not lay down a requirement of registration. It is only when one refers to S. 8(1) of the MSMED Act that the requirement of filing a memorandum6 arises in case any person intends to establish a micro or small enterprise.
In light of the above discussion, it may not be surprising, if tax department contends that any sum payable to an unregistered enterprise satisfying the criteria of micro or small enterprise would also fall within the scope of S. 43B(h).
However, it is also important to note that disallowance u/s 43B(h) can be made where any sum is payable beyond the time limit specified under S. 15 of the MSMED Act.
Now, S. 15 essentially provides that a ‘buyer’ shall make payment to a ‘supplier’ within the specified time. As per S. 2(n) of MSMED Act, the term ‘supplier’ means a micro or small enterprise which has filed a memorandum.
In Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods Pvt. Ltd. [SLP(C) No. 12884/2020], the Apex Court held that in order to seek the benefit under the MSMED Act, the seller should be registered under the MSMED Act, as on the date of entering into the contract. If any registration is obtained subsequently, the same would have an effect prospectively and would apply to the supply of goods and rendering services subsequent to the registration.7
A combined reading of the aforesaid provisions of the MSMED Act and the Apex Court’s decision and also giving a purposive interpretation to S. 43B(h), a better view seems to be that S. 43B(h) would not apply if an enterprise is unregistered under MSMED Act.
13. In order to evaluate the applicability of S. 43B(h), the supplier must be registered as MSE as on which date – (a) date of entering into a contract (b) date of delivery of goods or rendering of service (c) date of issuing the invoice (d) date on which payment is made?
One plausible view is that the supplier must be registered as MSE on the date of entering into the contract. The terms of the contract (viz. pricing, credit period, payment terms, etc.) that would be agreed between the parties on the date of entering into the contract would be based on the fact that the supplier is not MSE registered. Such terms cannot be rendered invalid by a subsequent act of registration by the supplier. Say for instance, the parties have agreed for a credit period of 60 days. Now, subsequently if the supplier takes MSE registration, the contract cannot be rendered void by applying an upper cap of 45 days (as per MSME Act) on the credit period originally agreed. Thus, as per this view, if the supplier is not registered as MSE on the date of contract, the provisions of S. 43B(h) would not apply.
Another plausible view is that the incidence of applicability of S. 15 of the MSME Act is the supply of goods or rendering of services. Thus, if at the time of supply of goods or rendering of services, the supplier is MSE registered, the provisions of S. 43B(h) would be attracted, irrespective of whether the supplier was MSE registered as on the date of contract or not.
Following decisions can be referred to –
14. How would the buyer come to know whether the supplier is registered as an MSE?
Apprehensions have been expressed in the past on omission of mention of suppliers by the buyers and auditors in their annual statement of accounts, if the supplier does not state his MSME status on the supply order/ invoices and other documents.
In this regard, the MSME Policy Division vide Office Memorandum dated August 26, 2008 stated that “4. The matter has been examined. It is considered advisable that the Micro and Small Enterprises should mention/ get printed on their letter heads, supply order sheets, invoices, bills and other relevant documents, the Entrepreneurs Memorandum (EM) Number {as allotted after filing of the said Memorandum, by the District Industries Centre (DIC) or competent authority, as notified by their respective State Government/ UT administration}, so that there always remains an identification of being a MSE supplier.”
Thus, it can be said that the supplier must disclose their Udyam Registration Number in the contract, invoice and other relevant documents. If the said information is not disclosed, the buyers may consider obtaining a declaration from the supplier on its MSME status.
15. Can disallowance u/s 43B(h) of the IT Act be made if the supplier fails to intimate MSE registration to the buyer?
If the supplier fails to intimate about its MSE registration to the buyer as discussed in FAQ14 above, then in the absence of information, it may be difficult to examine the applicability of S. 43B(h). However, if the tax department is able to identify the MSE registered suppliers and cases of delayed payment, say by issuing notice u/s 133(6) to the suppliers, then the disallowance u/s 43B(h) can still be made. However, if the buyer has exercised due diligence, say calling for declaration from the suppliers regarding their MSE status and communicating that in the absence of declaration it would be presumed that you are not MSE, then risk of penalty can be mitigated.
16. Whether delayed payments to an MSMED registered ‘trader’ would attract disallowance u/s 43B(h) of the IT Act
In order to address this question, it would be worthwhile to refer S. 2(e) of the MSMED Act which defines the term “enterprise” to mean an establishment engaged in manufacture or production of goods pertaining to industries specified therein or engaged in providing or rendering any services.
Since the definition of an enterprise only covers manufacture or production of goods and rendering of services, a trader may per se not be regarded as an enterprise. However, the Ministry of MSME vide OM dated July 02, 2021, has allowed Udyam Registration for Retail
and Wholesale traders, but the benefits are restricted to Priority Sector Lending only. Also vide another OM dated September 01, 2021, the Ministry reiterated and clarified that any other benefits including provisions relating to delayed payments are excluded for traders.
If the benefit of S. 15 of MSMED Act itself is not extended to these traders, then basis purposive interpretation, it can be contended that S. 43B(h) cannot be applicable in this case.
17. If a supplier is engaged in both, trading and manufacturing activities, would S. 43B(h) of the IT Act be applicable?
The MSME registration and also S. 15 of the MSMED Act is qua a person and not qua a segment. Thus, it would be quite adventurous to take a view that S. 43B(h) would not apply qua the trading segment, unless courts take such a view.
18. Can disallowance u/s 43B(h) of the IT Act be made in case of year-end provisions?
In order to determine the time limit under S. 15 of MSMED Act within which the MSE dues are to be paid, the actual delivery of goods or rendering of service is essential.
Thus, where the year-end provision relates to goods actually delivered or services already rendered, then the provisions of S. 43B(h) can be triggered.
Just like the endless litigation on TDS on year-end provisions, the interplay between S. 43B(h) and year-end provisions would invite tremendous controversies. To list down a few –
What would be the implications where goods are delivered or services are rendered, but invoice has not been raised?
S. 15 of MSME Act intends to grant protection to MSEs against delayed payments. If an invoice is not raised, where is the question of delayed payment?
Year-end provisions vis-a-viz S. 43B(h) would perhaps entail major tax disputes in the years to come.
19. Can disallowance u/s 43B(h) be made if the expenditure is capital in nature?
The opening words of S. 43B read as “Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—".
Since deduction for capital expenditure, may not be allowable otherwise, S. 43B(h) would not be invoked in such a case.
20. Can disallowance u/s 43B(h) be made if the buyer has opted for presumptive taxation?
Both S. 43B and the provisions for presumptive taxation found in sections 44AD, 44ADA, 44AE, etc. start with a non-obstante clause. The ordinary rule of construction is that where there are two non-obstante clauses, the later enactment shall normally prevail.8
Now, S. 43B was introduced vide Finance Act, 1983 whereas most of the presumptive taxation provisions were inserted thereafter. Thus, in such cases a view can be taken that despite being aware of S. 43B, the Legislature extending the non-obstante clause to anything contrary contained in sections 28 to 43C, in case of presumptive taxation provisions. Thus, presumptive taxation provisions in most cases, being later provisions will override S. 43B(h). Also, a view can be taken that presumptive income being statutory cannot be recomputed with reference to any other sections9 and thereby, S. 43B(h) would not apply to buyers following presumptive taxation.
The above document is contributed by – Ronak Doshi and Jinal Jain, Partners Priyank Gala, Associate
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This document is intended to provide certain general information and should not be construed as professional advice. It should neither be regarded as comprehensive nor sufficient for the purposes of decision making. The firm does not take any responsibility for accuracy of the document nor undertakes any legal liability for any of the contents in this document. Without prior permission of the firm, this document may not be quoted in whole or in part or otherwise.