Good news for MSMEs! The Finance Act 2023 introduced a new provision, Section 43B(h) of the Income Tax Act, that aims to improve their cash flow. But how does this impact your business? Let’s break it down.
What’s the Change?
Previously, businesses could deduct expenses related to goods or services purchased from MSMEs in the year they incurred them, regardless of the payment date. Now, under Section 43B(h), you can only claim the deduction if you pay the MSME within the deadline specified by the MSMED Act, 2006.
Key Points for Businesses:
- Applies to: Businesses buying from MSME vendors (buyer registration under MSME Act not required).
- Effective Date: April 1, 2024 (assessment year 2024-25).
- Payment Deadlines:
- Without written agreement: 15 days.
- With written agreement: As agreed, but not exceeding 45 days.
Benefits for MSMEs:
- Faster access to funds.
- Improved cash flow.
Consequences of Non-Compliance:
- Increased Taxable Income: Unpaid MSME dues get added to your taxable income, increasing your tax burden.
- Disallowed Deduction: You cannot deduct the expense in the year it was incurred, only in the year of payment.
Example:
- You buy supplies worth ₹10,000 from an MSME in March 2024 but pay in June 2024 (beyond the deadline).
- The ₹10,000 gets added to your taxable income for 2023-24 (assessment year 2024-25).
- You cannot deduct the expense in your 2023-24 tax filing.
- You can claim the deduction in your 2024-25 tax filing (when the payment is made).
Additional Points:
- There are no extra penalties for non-compliance, but delaying payments can damage your vendor relationships and creditworthiness.
- Exporters have raised concerns about this rule impacting their liquidity due to longer payment cycles in exports.
What to Do Now?
- Review your vendor list and identify MSME suppliers.
- Update your accounts payable processes to ensure timely payments to MSMEs within the deadlines.
- If you’re an exporter facing challenges, consult a tax advisor to understand potential exemptions or solutions.
Conclusion:
Section 43B(h) is a positive step for MSMEs, but it requires businesses to adapt their payment practices. By staying informed and adjusting your processes, you can ensure smooth operations and avoid any tax implications.
FAQs on Section 43b(h)
- Is the provision of section 43b(h) applicable to income declared under sections 44AD/ADA?
- Answer: No, the provisions of section 43b(h) are not applicable to sections 44AD/ADA. This is because section 43b(h) starts with the phrase “Notwithstanding anything to the contrary contained in sections 28 to 43C,” and section 43(h) falls within this range.
- What are the consequences of not making a payment within 45 days?
- Answer: If the payment is not made within 45 days, the expense will be disallowed under the Income Tax Act. Additionally, the stringent provisions of the MSME Act will come into play, requiring the buyer to pay interest on the outstanding amount. This interest is calculated at a rate three times the bank rate notified by the RBI, with compounding on a monthly basis. Currently, with the bank rate at 5.15%, this would amount to an interest rate of 15.45%.
- What does “written agreement” mean?
- Answer: The term “agreement” is not explicitly defined in the act, so it can be either oral or written. However, any written document specifying the agreed time period will be considered as the agreement for this provision.
- From which date should the 15/45 day period be calculated?
- Answer: The period should be calculated from the date of acceptance of the goods or services, which is the date of delivery of the goods. The date on the invoice is irrelevant. Therefore, even if the goods remain with the transport for more than 45 days, this provision does not apply. It only becomes applicable upon the actual receipt of the goods or services.