The Finance Bill 2023 has a new insertion of clause (h) to section 43B of the Income Tax Act 1961. The said clause has been inserted as a Socio Economic Welfare Measure to ensure timely payments are realized by micro and small enterprises. Section 43B of the Act provides for certain deductions to be allowed only on actual payment. The Finance Bill 2023 has newly inserted a clause to this section which is read as under:
Section 43B (h): “any sum payable by the assessee to a MICRO or SMALL enterprise beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006,”
The above clause indicated that, in order to be eligible to claim deduction of the sum payable to micro and small enterprises, the payment shall be actually made within the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006.
What is the Time Limit specified u/s 15 of the Micro, Small and Medium Enterprises Development Act, 2006 ?
Section 15 of MSME Development Act, 2006 stipulates that “Where any supplier supplies any goods or renders any services to any buyer, 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*:
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall not exceed forty-five days from the day of acceptance or the day of deemed acceptance”
From the above it is clear that, the buyer shall make the payment to the supplier as agreed between them, however the same cannot exceed beyond 45 days from date of acceptance or the day of deemed acceptance i.e., from the day of acceptance of the goods/service.
*‘Appointed day’ means day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
Consequences upon Failure to make payment to MSME’s within time Limit specified u/s 15 of MSME Development Act, 2006
The buyer who fails to make the payment to the supplier of goods or service being the organization registered as a micro or small enterprise, shall be hit by the new insertion of Finance bill 2023 vide clause (h) of Section 43B in addition to the compensatory interest liability as imposed by section 16 of MSME Development Act, 2006 which is also an ineligible business expenditure. The said consequences are as under:
(i) Compensatory Interest: Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank. The bank rate notified by the RBI for this purpose is the RBI Repo Rate as on.
(ii) Disallowance of Compensatory Interest paid to MSME’s: As per the provisions of Section 23 of MSME Development Act, 2006, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of MSME Development Act, 2006, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.
(iii) Disallowance of Expenditure: Any sum payable by an assessee for the expenditure incurred or payment against the purchase to the supplier who is registered as a micro or small enterprise shall be disallowed if the same is not paid within the time limit specified in 15 of the MSME Development Act, 2006 as discussed above.
- The clause is applicable only for the sum payable to the Micro & Small Enterprises. Therefore, the sum payable to Medium Enterprise is eligible for deduction on accrual basis also.
- Enterprise means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services.
- The Central Government is empowered to classify any class or classes of enterprises, whether proprietorship, Hindu undivided family, an association of persons, co-operative society, partnership firm, company or undertaking or any other legal entity as micro, small or medium enterprise. This section overrides section 11B of the Industries (Development and Regulation) Act, 1951.
The classification of the enterprise as Micro, Small & Medium as defined in Micro, Small and Medium Enterprises Development Act, 2006 is hereby produced for your reference:
1. Micro Enterprise
Investment less than Rs. 1 crore Turnover less than Rs. 5 crore.
2. Small Enterprise
Investment less than Rs. 10 crore Turnover less than Rs. 50 crore.
3. Medium Enterprise
Investment less than Rs. 20 crore Turnover less than Rs. 100 crore.
It is advisable to the business entities to take an Annual Declaration from their supplier indicating that they are micro or small enterprises registered under the Micro, Small and Medium Enterprises Development Act, 2006 which will facilitate the buyer to identify the enterprise and to ensure the due compliances. Further, the micro and small enterprises are also advised to mention a note on the invoice issued by them indicating that they are registered as micro or small enterprise under MSME Development Act, 2006 to facilitate the buyer about the compliance requirements.
- The effective date for the applicability of clause (h) of Section 43B would be from 1st April, 2024. This has to be interpreted as any outstanding sum payable to the micro & small enterprises as on the last day of financial year 2023-24 and onwards remaining unpaid beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006 shall be disallowed and added back to the income as computed under section 28 of the Income Tax Act, 1961 from 1st April 2024.