Income Tax Section 43B(h)

Section 43B(h) is an additional clause added to Section 43B that deals with deductions allowed under the head ‘income from business and profession’. It states that any dues to businesses registered as an MSE (micro and small enterprise) must be paid within the stipulated timeline to claim it as a business deduction.

For payments to be counted as deductions, businesses must complete the payment in the same financial year as claiming it. The maximum allowed time is 15 days for payments made without an agreement and 45 days for transactions with an agreement, as stated in Section 15 of the MSMED Act 2006. The deadline is counted from the day of delivery of goods and services.

Only timely payments made within 15 or 45 days are allowed as deductions in the same financial year. For delayed payments, the buyer can claim them as deductions only in the financial year in which the sum is paid, regardless of the accounting method used.

See Also: Section 44ADA of the Income Tax Act

Let’s discuss the provisions of Section 43B(h), including its eligibility, applicability and more.

Who Does It Apply to?

The provisions of Section 43B(h) of the Income Tax Act apply to micro and small businesses registered under the Micro, Small and Medium Enterprises Development Act 2006. However, the buyer does not need to be registered as an MSE.

As per Office Memorandum No. 5/2(2)/2021-E/P, Section 43B(h) does not apply to dues outstanding to wholesale and retail traders registered under the Udyam portal for priority sector lending. Thus, it applies only to manufacturers and service providers registered as MSEs. It also doesn’t apply to medium enterprises.

MSME Turnover Limit

To be eligible for timely payments as an MSE, a business needs to ensure it meets the turnover limits as per 43B (h) Income Tax of India, given below:

• Turnover Limit for Micro Enterprises: Any manufacturing and service enterprise with an investment of less than ₹1 crore in machinery and equipment and an annual turnover of less than ₹5 crores. The Union Budget 2025 has increased the investment limit to ₹2.5 crores and the yearly turnover limit to ₹10 crores.
• Turnover Limit for Small Enterprises: Any manufacturer or service provider with an investment in machinery, plant and equipment of less than ₹10 crores and an annual turnover of less than ₹50 crores. From 2025-26 onwards, the limit has been raised to ₹25 crores for investments and ₹100 crores for yearly turnover.

ABC Private Limited enters into a contract with XYZ Enterprises to buy goods and services from the latter, which is a registered MSME. Here is a series of payments with due dates u/s 43B(h) and when they can be claimed for deduction:

• Reduces Disputes Between Buyers and Sellers: Delayed payments are the biggest cause of disputes between buyers and sellers. By introducing strict deadlines for payments, the whole process is streamlined for all parties, leading to fewer disputes and legal complications.
• Improves the Bargaining Power for MSEs: Section 43B(h) has improved the bargaining power of MSEs in India. With it, micro and small businesses can confidently grow their business and negotiate better terms with large companies.
• Supply Chain De-Risking: By improving the cashflow of smaller businesses, the subsection 43B(h) incentivises the growth of a healthy MSE ecosystem. With small businesses less likely to default, it has improved the supply chain of larger businesses as well.
• Promotes Compliance and Transparency: Section 43B(h) promotes transparency in financial practices and adherence to the country’s regulations. For buyers, a compliant process lowers audit times and improves their corporate governance. This reduces legal expenses and increases the value for investors.

The following are the consequences for delayed payments as per Section 43B(h):

• Delay in Claiming Business Deductions: Clause (h) of Section 43B disallows deductions on delayed payments made to MSEs after the specified deadline of 15 or 45 days. This means that these deductions cannot be claimed in the same financial year, even when the payment is made within the return filing date.
• Compound Interest Penalty: Any buyer who fails to make payment to an MSE within the specified period must pay compound interest at a rate notified by the Reserve Bank of India. The interest is three times the bank rate and is not eligible for deductions.
• Increased Tax Liability: If you purchase ₹2 lakhs worth of goods from a registered MSE but fail to clear your dues on time, the amount will be added to your taxable income. This will increase your tax liability for the year.

To ensure compliance with Section 43B(h) of India’s Income Tax Act, buyers need to identify vendors registered as an MSE. Follow the given steps to verify vendors:

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 your registered mobile number or email address.

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

See Also: Income Tax Filing for Freelancers

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. It’s a move towards promoting financial discipline in the MSE sector and overcoming working capital shortages for small businesses.

While ensuring statutory compliance is vital for a business owner, it’s equally important to secure yourself and your employees' medical needs with a health insurance plan. Health insurance is a necessity in today’s world to cover rising medical expenses and unplanned hospitalisation. A good health insurance provides financial security by covering a wide range of diseases and treatment expenses.

TATA AIG’s Individual Health Insurance is the perfect choice for getting personalised coverage at competitive prices. It offers lifelong renewability and benefits like global coverage, high-end diagnostics, preventive health checkups and more. Buy health insurance today to cover your health risks.