Section 43B(h) Applicability Micro and Small Enterprise

To foster prompt payments to micro and small enterprises (MSEs), payments to such entities have been encompassed within the scope of section 43B of the Act through the Finance Act (FA) 2023. A new clause (h) has been introduced in section 43B to stipulate that any amount payable by the assessee to an MSE beyond the timeframe specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 will be deductible solely upon actual payment.

Section 15 of the MSMED Act mandates payments to MSEs within the timeline agreed upon in writing, not exceeding 45 days. In the absence of a written agreement, payment must be made within 15 days. Consequently, this amendment to section 43B ensures that deductions for payments to MSEs are allowed only upon actual payment and can be accrued only if payment is made within the timeframe mandated under section 15 of the MSMED Act.

To provide further clarity on the practical application of this amendment, the following FAQs have been compiled:

Q1: When does this amendment become effective?

A1: This amendment takes effect from Assessment Year (AY) 2024-25, corresponding to Financial Year (FY) 2023-24 specifically w.e.f 01-04-2023

Q2: Which entities qualify as MSMEs?

A2: MSMEs are categorized as Micro, Small & Medium Enterprises based on investment in plant & machinery or equipment and turnover.

Micro Enterprise:
Investment in Plant and Machinery , equipments less than Rs 1 Crore and Turnover less than Rs 5 crore

Small Enterprise:
Investment in Plant and Machinery , equipments less than Rs 10 Crore and Turnover less than Rs 50 crore

Note: This amendment applies only to Small and Micro Enterprises, excluding Medium Enterprises.

Q3: Does this amendment apply to outstanding amounts to MSEs as of 31/03/2023?

A3: No, it applies only to payables as on 31-03-2024.

Q4: Is MSMED registration mandatory to attract disallowance under section 43B(h)?

A4: While registration is encouraged, it's not a precondition. Declarations clarifying enterprise type suffice for compliance.

Q5: How can one verify a supplier's MSMED registration?

A5: Many suppliers now include their registration numbers on invoices. Verification is possible through the MSME Portal using the registration number.

Q6: What if a supplier fails to inform the buyer about their MSMED registration?
A6: Without such information, no disallowance can be made under section 43B(h).

Q7: Does section 43B(h) apply to traders with MSMED registration?

A7: Traders aren't included in the definition of Enterprise as per MSMED Act, 2006. They are covered in MSMED act only for priority sector lending. Hence, 43B(h) doesn't apply to them.

Q8: Does section 43B(h) apply if a supplier engages in both trading and manufacturing/services?

A8: Yes, it applies in such cases.

Q9: Can disallowance under section 43B(h) be attracted for outstanding dues related to capital expenditure?

A9: No, as capital expenditure isn't an allowable expense under the Income Tax Act.

Q10: How are year-end provisions treated for disallowance under 43B(h)?

A10: Provisions are not payables. Section 43B(h) applies only to any sum payable as on 31st March of any previous year.

Q11: What if a buyer pays a supplier after the specified timeframe but within the financial year?

A11: Deduction can be claimed in the same financial year. If an assessee buys goods worth Rs. 10 lakh from a micro enterprise on 01-10-2023 and makes payment on 30-03-2024 then the amount of Rs. 10 lakh will be allowed in FY 2023-24 but if he makes payment of 01-04-2024 then the same shall be disallowed in FY 2023-24 but allowed in FY 2024-25.

Q12: Does disallowance under 43B(h) apply to assesses opting for presumptive taxation?

A12: No, section 43B doesn't apply to such assesses.

Q13: What's the chargeability of interest on delayed payments to MSMEs?

A13: Section 16 mandates compound interest on delayed payments, but such interest isn't deductible under the Income Tax Act. Interest will be equal to three times of bank rate notified by reserve bank of India.

Q14: What assessee has to do in FY 2023-24 ?

A14: Draft an email to all your suppliers and ask them whether they are micro and small enterprise, if they are. Ask them for MSME/Udyam Certificate and check the disallowance. Prepare a list of all your creditors outstanding which are going to be disallowed, pay them before 31-03-2024.


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