Section 43B(h) of Income Tax Act

Key amendment under Section 43B of Income Tax Act for Micro and Small enterprises from AY 2024-25                                                          

To promote timely payments to Micro and Small enterprises, A new clause (h) in section 43B has been inserted which allows any amount paid to micro and small enterprises as deduction from business income only on actual payment basis. Medium Enterprises having turnover more than or equal to Rs. 50 crores are not covered under this clause. Thus, this amendment to section 43B of the Act will allow the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under Section 15 of the MSMED Act 2006 (Maximum within 45 days in case of written agreement or within 15 days if no agreement exists).

Following are the classification criteria for Micro and Small Enterprises:

Any payment which is made during the year for the purchases/services/expenses billed in the same year are allowed as business expense even if 45/15 days condition is not fulfilled because payment is made in the year of billing itself but provision of interest needs to be made as per MSME Act for the late payments. Tax Payer are required to separate any amount outstanding to Micro and Small enterprises reflecting on 31^st March, 2024.  For Example, amount outstanding to Micro and Small enterprises is Rs. 1 Crore and Net profit is Rs. 10 lakhs for FY 2023-24, Rs. 1 crore will be disallowed and added to Net profit if 45/15 days condition for payment is not fulfilled. Now Income Tax will be calculated on Rs. 1 Crore 10 Lakhs. Such disallowed amounts will be allowed in the year of actual payment. However, Opening Balances as on 01.04.2023 will not be considered while calculating amount of disallowance as these are claimed as business deduction in earlier years before the provisions of this clause came into effect.

On MSME portal, one can easily verify registration of Udyam Aadhaar of the supplier and type of enterprise (Micro/ Small/ Medium). Supplier has the responsibility to intimate its Udyam Aadhaar to the buyer. In case of no information to the buyer, no disallowance can be made under section 43B(h).

Traders are not included in definition of Enterprises under MSMED Act. Enterprises means businesses engaged in the manufacture or production of goods or engaged in providing or rendering of services. Hence,
section 43B(h) is not applicable for amounts outstanding to traders. However, Ministry of MSME has allowed Udyam Registration of Traders but that too restricted to Priority Sector Lending viz., agriculture and small-scale industries Only.  Disallowances under section 43B(h) cannot be made in case of assessee opting presumptive taxation (sec 44AD/ ADA/ AE) as section 43B is not applicable in these cases.

This amendment will not affect any amount outstanding to Micro and Small enterprises in respect of goods/ services which are not debited to Profit & Loss A/c but capitalised as an asset in the financials. This provision will never apply to such payments.

Tax Auditors need to check whether section 43B(h) of the Act is complied with and they are liable for proper reporting of disallowed expenses under Section 43B(h) in their Tax Audit Report. All the assessee who are maintaining proper books of accounts are covered under the above clause.

Illustrative Examples:

Conclusion

In view of the discussion above, this amendment in Section 43B is a boom for the growth of Micro and Small enterprises. It will accelerate their performance due to timely payments to them and no default from Buyer side. On the other hand, it will lead to high tax consequences for the buyers if delay happens in actual payment by them.