Amendment via Finance Act, 2023 whereby clause (h) was inserted in Section 43B of the Income tax Act, 1961 (ITA) which aimed to encourage timely payments to micro and small enterprises (MSEs). This shall come into effect from April 1, 2024 and will accordingly apply to the assessment year (‘AY’) 2024-25 i.e., Financial Year 2023-24 and subsequent years.

Background and analysis

• Clause (h) to section 43B of the ITA specifies that any sum payable by the taxpayer to a Micro or Small Enterprise (‘MSE’) which is paid beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 will be deductible in the year of actual payment.
• The provision covers payments made to any MSEs engaged in the manufacture/ production of goods (OR) engaged in providing or rendering any services and are registered under the MSMED Act
• It is also important to note that the proviso providing the benefit of allowance under section 43B in cases where payments are made before the due date of tax return filing specifically excludes clause (h) i.e., payments to MSMEs. In this regard, section 43B(h) of the ITA allows deduction where the payment is outstanding as at the end of the year but is paid within time permitted under section 15 of MSMED Act.
• It is also pertinent to note that in case of dispute on the goods delivered or services rendered, explanation to section 2(b) of MSMED Act prescribes the time limit for raising the objection/ dispute to be 15 days from the date of delivery of goods or rendering of such services. This would be relevant in case there are any payments due to such MSE entities where there are any issues/ disputes on goods delivered/ services rendered.
• The provisions of section 15 of the MSMED Act prescribes due date of payment to MSEs depending upon facts regarding existence/ non-existence of agreement for due date of payment between buyer and the MSE supplier as follows.

Impact/Relevance

• If payment is being made to MSE beyond the period of 15/ 45 days, then such amount would be subject to disallowance under section 43B(h) of the Act if it remains ‘unpaid’ as on March 31, 2024.
• Section 16 of MSMED Act provides for interest to be paid if the payments are made beyond the period specified under section 15 of MSMED Act. Further, section 23 of MSMED Act stipulates that any interest paid or payable under MSMED Act shall not be allowed as a deduction under the ITA.
• Considering that March 31, 2024 is approaching, it is important to keep track of the outstanding dues to MSMEs and make settlements before March 31, 2024 to avoid triggering disallowance under section 43B(h) of ITA.