Section 43B(h) Of Income Tax Act

The Finance Act of 2023 introduced Section 43(h) in the Income Tax Act. This new section impacts the financial interactions between large businesses and the Micro and Small Enterprises.

Section 43(h) allows businesses to deduct payments that were made to Micro and Small Enterprises for goods or services from their income in the same financial year. However, these payments must be made within the periods specified by the MSMED Act of 2006.

This provision is crucial as it addresses the common concern of delayed payments to Micro and Small Enterprises. These delays often result in a shortage of working capital for small businesses.

By ensuring timely payments, Section 43(h) aims to tackle the concern of delayed payments and their negative impact on the Micro and Small Enterprises, supporting their financial health and operational continuity.

Example of Section 43B(h)

Consider a large enterprise that has purchased IT solution services from a small company, amounting to ₹8 Lakhs in expenses. As per the MSMED Act, the large enterprise must make the payment within the 45 days of receiving the services.

If the large enterprise completes the payment in this timeframe, they can deduct the entire amount from their taxable income of that financial year. This lowers their tax burden significantly.

This is how Section 43B(h) helps both the larger enterprise and the small businesses.

Who Does Section 43B(h) Affect?

Section 43B(h) primarily affects large enterprises that engage in transactions with Micro and Small Enterprises. According to the MSMED Act of 2006, an enterprise is classified as an Micro and Small Enterprise based on its investment and turnover:

Any enterprise that falls within these criteria is eligible for the benefits provided by Section 43b of the Income Tax Act MSME.

From when is the Section 43B(h) effective ?

Section 43B(h) is applicable from April 1, 2024, and will affect the assessment year (AY) 2024-2025 onwards. This means that for the financial year (FY) 2023- 2024, businesses must comply with the new 45 days payment rules to ensure timely payments to MSEs.

What is the 45 days Payment Rule ?

Section 43B(h) mandates that payments for goods or services provided must be settled before the MSME payment due date which is 45 days from the date of acceptance. If businesses fail to meet this deadline, they will be at risk of being unable to claim these payments as tax deductions.

If no written contract specifies the payment terms, the buyer must pay within 15 days of accepting the goods or services from Micro and Small Enterprises. On the other hand, if there is a written agreement, the payment terms specified in the contract must be honoured.

However, this period cannot exceed 45 days from the date of acceptance or the date of deemed acceptance of the goods or services.

Implication of Section 43B(h)

For Large Enterprises

Tax compliance - One of the most significant implications for enterprises is the impact on tax compliance. Section 43B(h) mandates that payments to Micro and Small Enterprises must be made within the stipulated time frames to qualify for deductions in the same financial year.

This encourages large enterprises to propose timely payments and promotes better financial practices to ensure that they can fully benefit from tax deductions.

Operational Efficiency - Large enterprises must now implement better payment processes to comply with Section 43B(h). This means establishing efficient systems to track invoices, monitor payment due dates and ensure timely settlements to avoid any chances of Section 43B disallowance.

Such measures help maintain smooth business operations, foster strong relationships with Micro and Small Enterprises and ensure financial discipline.

For Micro and Small Enterprises

Improved Cash Flow - Timely payments are crucial for maintaining a steady cash flow, which is essential for the day-to-day operations of smaller businesses. Section 43B(h) ensures that Micro and Small Enterprises receive their payments within a specified period, helping them manage their finances more effectively and reduce the risk of cash flow disruptions.

Reduced Financial Strain - One of the common issues faced by Micro and Small Enterprises is the lack of working capital due to delayed payments from larger enterprises. By mandating timely payments, Section 43B(h) helps alleviate the financial strain on Micro and Small Enterprises and ensures their financial stability, contributing to their long-term financial growth.

For Traders

Specific Exclusions - While traders and businesses dealing with Micro and Small Enterprises must adhere strictly to the payment timeline, Section 43B(h) does not apply to transactions with wholesale and retail traders.

This exclusion is significant because it highlights the targeted approach of the legislation, focusing on manufacturing and service providers within the MSME category to ensure they benefit from timely payments.

Compliance Requirements

Businesses must adopt robust internal processes to ensure timely payments to Micro and Small Enterprises to avoid the Section 43B disallowance, including :

Tracking Payments- Implementing systems to monitor MSME payment due dates and ensure payments are made within the stipulated time.

Maintaining Contractual Clarity- Specifying payment terms in all contracts with Micro and Small Enterprises to avoid ambiguity.

Having Regular Audits- Conduct regular reviews of payment processes to ensure compliance with the MSME payment rules.

**Penalties for Late Payment **

Delays in MSME 45 days payment result in significant penalties, including:

Interest Rate- Businesses must pay compound interest at three times the bank rate notified by the Reserve Bank of India (RBI)

Interest Calculation- Interest is payable from the day following the MSME payment due date. If there is no specific date, interest accumulates from the day after 15 days of acceptance or deemed acceptance of goods or services.

Interest paid on overdue amounts to Micro and Small Enterprises is not deductible as a business expense under the Income Tax Act. This non-deductibility increases the financial burden on businesses that delay payments, as they cannot offset the interest expense against their taxable income, leading to a Section 43B disallowance.

Beyond timely payments, Section 43B(h) enhances liquidity for Micro and Small Enterprises, providing them with working capital for operational costs.

• It enables deductions for larger enterprises based on prompt payments and helps optimise tax liabilities.

• It strengthens the negotiation leverage for Micro and Small Enterprises with larger enterprises.

• It promotes adherence to honest payment practices and a healthier business environment.

• Along with minimising any payment-related conflicts, it also helps curb any legal issues.

• It helps support a robust supply chain by promoting the financial health of Micro and Small Enterprises.

Step 1: Visit the official Udyam Registration Portal.

Step 2: Enter the Udyam Registration Number obtained during the business registration process.

Step 3: Enter the necessary verification details, such as the PAN or Aadhaar number associated with the business.

Step 4: Complete the verification by entering the OTP sent to registered mobile number or email address.

Step 5: Once verification is successful, the portal should display the MSME Registration status and relevant details.

Section 43B(h) of the Income Tax Act ensures timely payments to Micro and Small Enterprises, fostering their financial stability and enhancing the overall business environment. By mandating prompt payment, this section helps maintain the financial health of small enterprises which is crucial for their growth and sustainability.

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