Delayed payments to Micro &Small Enterprises (MSEs) just got a lot more expensive for larger businesses, thanks to a new clause in the Income Tax Act. Introduced in the 2023 Union Budget,w.e.f 1st April 2023, Section 43B(h) is shaking up the landscape of business-to-business payments in India, potentially paving the way for a fairer and more supportive ecosystem for micro & small businesses. But it has to be noted that this new clause will not be applicable to the units falling under the medium category of the MSME Act. It will also not be applicable to MSEs Traders but will be available only for manufacturing & service sectors.
Previously, businesses could claim tax deductions for expenses incurred on payments to MSEs on an accrual basis, even if the payment itself was delayed. This meant big companies could enjoy immediate tax benefits while MSEs often faced long wait times for their dues, impacting their cash flow and overall financial health.
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Section 43B(h) disrupts this dynamic. It stipulates that deductions for any amount payable to an MSEs will only be allowed in the year the actual payment is made, provided it falls within the prescribed time limit set by the Micro, Small & Medium Enterprises Development Act, 2006. These timelines are 15 days in the absence of a written agreement and 45 days if a written agreement exists.
Illustration.
•ABC Industries, a large manufacturing company, purchases raw materials from XYZ Enterprises, an MSEssupplier.The total bill amount is Rs. 1 lakh, and the agreed payment term is 30 days.Under the old system, ABC Industries could claim a tax deduction for the Rs. 1 lakh in the financial year the purchase was made, even if they delayed the payment to XYZ Enterprises beyond 30 days.Now, with Section 43B(h) in place, ABC Industries will only be able to claim the deduction in the year they actually pay XYZ Enterprises, as long as the payment is made within 45 days of the purchase. Any delay beyond that timeline will mean the deduction is lost for that financial year. It will available in the financial year in which it is ultimately paid off to the MSE unit.
•Section 43B(h) addresses a longstanding concern of delayed payments affecting MSEs operations. This will bring in much-needed discipline and encourage larger businesses to prioritize clearing dues within the established timeframes.”
The impact of Section 43B(h) will be multi dimensional as under:
•Improved Cash Flow for MSEs: With delayed payments no longer offering tax benefits, businesses will be incentivized to clear their dues on time, boosting MSEs cash flow and operational efficiency.
•Shifting Corporate Behavior: Larger companies may need to adjust their financial planning and payment processes to comply with the new timelines. This could lead to a more streamlined and transparent approach to vendor payments.
•Potential Challenges: Concerns exist regarding the potential for increased paperwork and administrative burden for both businesses and MSEs. Additionally, some worry that the clause could discourage business partnerships with MSEs due to stricter payment terms.
•Impact on Taxable Income: Failure to comply with these deadlines will result in the outstanding amount being added back to the assessee’s taxable income under Section 28 of the Income Tax Act. This essentially means increased tax liability for businesses delaying payments to MSMEs.
Overall, the introduction of clause (h) under Section 43B marks a significant step towards improving the financial health of the Indian MSME sector. By incentivizing timely payments, the new rule is expected to boost cash flow, encourage investment, and ultimately contribute to the growth& level playing field of the small business ecosystem.
