Introduction to Section 43B(h) of the Income Tax Act

The Finance Act of 2023 introduced Section 43B(h) of the Income Tax Act, which allows businesses to claim deductions for payments made to Micro and Small Enterprises (MSEs) for goods supplied or services rendered. This deduction is available as long as the payment is made within the deadline specified under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006.

This provision aims to address the working capital shortage faced by MSMEs and encourages businesses to make timely payments. It will be effective starting from the assessment year 2024-2025, with the changes coming into effect on April 1, 2024.

Key Features of Section 43B(h)

Here are the most important points you need to know about Section 43B(h):

• New MSME 45-Day Payment Rule: The MSME Act mandates that payments for goods or services provided by micro and small enterprises should be made within 45 days of receiving the goods or services. Section 43B(h) applies this rule for tax deduction purposes.
• MSME Turnover Limit: The MSME Act categorizes businesses based on turnover and investment. Payments under Section 43B(h) apply only to micro and small enterprises.
• Application to Businesses: This section applies specifically to businesses that owe payments to MSMEs. They can claim deductions in the same financial year if they pay within the prescribed 45-day timeline.

Applicability of Section 43B(h) on Traders and Other Businesses

• Applicability to Traders: Section 43B(h) applies to traders who owe payments to MSMEs. Traders must make payments within the 45-day period to claim deductions. For instance, if a trader purchases goods from an MSME and pays within 45 days, they can claim a deduction for that payment in the same financial year.
• Example: If a business purchases goods worth Rs. 1,00,000 from a micro enterprise and makes the payment within 45 days, it can claim a deduction in the same financial year. However, if the payment is made after 45 days, the deduction will not be allowed for that year.

Effective Date of Section 43B(h)

Section 43B(h) will come into effect from April 1, 2024, and will apply for the assessment year 2024-2025 and subsequent years. This means that businesses must adhere to the new rule starting in FY 2024-25. For example, purchases made before this date will not be subject to the new rule.

Time Limits for Payment under Section 43B(h)

According to Section 15 of the MSMED Act, 2006, businesses must make payments to MSMEs within 45 days of receiving goods or services, depending on the nature of the agreement:

• No Written Agreement: Payment must be made within 15 days from the date of acceptance.
• With Written Agreement: Payment should be made as per the terms agreed upon but should not exceed 45 days.

Penalties for Late Payment to MSMEs

When businesses fail to make timely payments to MSMEs, they face penalties under the MSMED Act:

1. Interest on Delayed Payment: Businesses must pay compound interest at three times the bank rate notified by the RBI.
2. Interest Payable: Interest is due from the day after the expiry of the payment deadline (15 days after acceptance if no agreement exists, or 45 days if an agreement specifies this).
3. Non-Deductibility of Interest: Businesses cannot deduct interest paid for late payments as an expense under the Income Tax Act.

Benefits of Section 43B(h)

Section 43B(h) provides benefits to both MSMEs and larger businesses:

• Benefits for MSMEs:
  • Ensures smoother payment cycles and better cash flow.
  • Improves their ability to negotiate payment terms with larger enterprises.
• Benefits for Larger Enterprises:
  • Allows businesses to claim tax deductions for payments made on time.
  • Promotes transparency in financial dealings, helping businesses remain compliant.

Examples and Clarifications

Here are a few examples to clarify the application of Section 43B(h):

1. Example 1: If a business buys goods worth Rs. 1,00,000 from a micro enterprise and makes the payment within 45 days, it can claim a deduction in the same financial year.
2. Example 2: If the payment is made after 45 days, the deduction cannot be claimed in that year. It will only be allowed when the payment is actually made.

Process to Check MSME Registration Status

To verify whether a business is registered as an MSME, visit the Udyam Registration portal. You can check the registration status by entering the MSME registration number or business details.

Frequently Asked Questions about Section 43B(h)

1.What does Section 43B(h) cover?

Section 43B(h) applies to payments made by businesses to micro or small enterprises. It ensures that such payments are deducted only when paid within the prescribed timeline.

2. What happens if the payment is not made within the deadline?

If payments are made after the deadline, businesses cannot claim deductions in the year the payment was due. The deduction will be allowed only in the year when the payment is made.

3. Are there penalties for failing to pay on time?

Yes, businesses must pay interest on overdue payments. The interest rate is three times the RBI’s bank rate, and it cannot be deducted as an expense.