Section 43B(h) Of Income Tax Act: Applicability, Date, Limit, Example
The Finance Act 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro and Small enterprises for goods supplied or services given may be deducted in the same year if it is paid within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
This amendment aims to address the issue of working capital scarcity in the MSME industry and promote prompt payments to micro and small businesses. The assessment year 2024–2025 and any following years will be covered by this change, which will come into effect on April 1, 2024.
Read along this blog to gain important insights about the section 43B(h) of the IT Act:
- New MSME 45 days payment rule
- MSME Turnover Limit
- Section 43B(h) applicability
- Section 43B(h) applicability on traders
- Effective date of 43B(h)
- Time Limit to pay MSMEs
- Examples of Section 43B(h)
- Penalties for failure to pay MSMEs
- Benefits of Section 43B(h)
- Process to Check MSME Registration Status
MSME Section 43B(h): New MSME 45 Days Payment Rule
The newly added clause (h) states that any sum payable by the assessee to a Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed).
MSME Turnover Limit
Micro and Small Enterprises are classified on the following basis:
Micro Enterprises, means an entity having an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, should invest in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores.
Section 43B(h) Applicability
This clause is applicable when an enterprise is buying goods or taking services from Micro and Small enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006 is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2024.
Example: Mr A (Unregistered under the MSMED Act) purchased Goods from Mr B (Registered under the MSMED Act). Whether section 43B(h) applicable.?
Yes, section 43B(h) applicable as a supplier is registered under MSMED Act.
Section 43B(h) Applicability On Traders
As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.
Example: Mr. A purchased Goods from Mr. B. Mr.B is a trader. Is section 43B(h) applicable?
No, section 43B(h) is not applicable as the supplier is a trader. It is applicable to Manufacturing and services Providers Only.
Section 43B(h) Effective Date
Section 43B Clause (h) is applied from April 1, 2024. This amendment applies from assessment year (AY) 2024-25.
Example: Mr A purchased Goods from Mr B on 31.03.23. Whether section 43B(h) is applicable?
No, section 43B(h) is Not applicable for the purchases made before 31.03.2023.
Section 43B(h) Time Limit
Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In case there is no written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
Example Of Section 43B (h)
| Sr. No. | Day of acceptance of any goods or services by a buyer from a supplier | Credit period (Days) | Due Date as per MSME ACT | Actual date of payment | Deduction allowed in which FY |
| 1 | 29/03/2024 | 60 | 13/05/2024 | 25/05/2024 | FY 2024-25 |
| 2 | 01/04/2024 | 45 | 16/05/2024 | 21/05/2024 | FY 2024-25 |
| 3 | 31/01/2024 | 15 | 15/02/2024 | 20/02/2024 | FY 2023-24 |
| 4 | 11/09/2023 | 20 | 01/02/2023 | 03/10/2023 | FY 2023-24 |
| 5 | 30/11/2023 | 30 | 30/12/2023 | 20/12/2023 | FY 2023-24 |
| 6 | 21/04/2024 | 40 | 31/05/2024 | 20/06/2024 | FY 2024-25 |
| 7 | 15/12/2023 | – | 30/12/2023 | 05/04/2024 | FY 2024-25 |
| 8 | 10/11/2023 | – | 25/11/2023 | 30/11/2023 | FY 2023-24 |
Penalties For Failure To Pay MSMEs
In the case of late payment to an MSME, interest is applicable.
Rate of interest: Compound interest at the 3 times the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is payable: The date as per the agreement or the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier (appointed day), as the case may be.
The deduction of this interest is not allowed as an expense, as per the Income-tax Act (ITA), 1961.
Benefits Of Clause(h) Of Section 43B
Benefits for MSMEs:
- Smooth Payment Cycle: Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is 15 days without a written agreement and 45 days with an agreement. This way, MSMEs are assured of timely cash flow, which is important for their sustainability and growth.
- Better Bargaining Power: The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities. It is possible for them to confidently push for deadlines aligned with the stipulated time frame, as they remain assured of consequences in case of delayed payments.
- Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues, are minimised. Thus saving time and resources for both MSMEs and larger businesses alike.
Benefits For Larger Enterprises:
- Tax Planning: While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities.
- Compliance and Transparency: Income-Tax Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
- Strong MSME Ecosystem: Ensuring prompt payments to MSMEs incentivises a robust MSME ecosystem. In the bargain, benefiting larger entities through a vibrant supply chain and ease of access to various resources.
In short, if invoices between 01.04.2023 to 15.02.2024 were paid before 31.03.2024, then Expenses are allowable in FY 2023-2024.
If Invoices between 16.02.2024 to 31.03.2024 were paid within 45 days days, then expenses are allowed in FY 2023-2024.(Assuming a written agreement of 45 Days is present between buyer & Supplier)
If it is not paid within the due date, then it is allowable in the year of Payment only. For Example, If invoices purchased in March 2024 were paid in June 2024, it is allowable as expenses in FY 2024-25.
How To Check MSME Registration Status
Through the MSME Portal, one can verify MSME registration and the type of enterprise (Micro/Small/Medium) by the registration number using the following link:
https://udyamregistration.gov.in/Udyam_Verify.aspx
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Frequently Asked Questions
What does Section 43B(h) cover?
The newly added clause (h) in Section 43B specifically covers any sum payable by the assessee to a micro or small enterprise. The amendment is introduced to ensure timely payments to such enterprises within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The payments that go beyond the specified time limit under Section 15 of the MSMED Act are covered under this clause and are allowed as deductions only upon actual payment.
Who is affected by Section 43B(h)?
Businesses that deal with Micro, Small and Medium Enterprises (MSMEs) will need to be more diligent in tracking and ensuring timely payments to these entities. Since deductions for delayed payments to micro and small enterprises can only be claimed upon actual payment, businesses may need to adjust their accounting and tax planning practices.
This would include potentially revising their cash flow management to accommodate timely payments or facing the tax implications of delayed payments. The amendment highlights the importance of adhering to the payment timelines specified under the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006, to avail of tax deductions efficiently.
Furthermore, the tax auditor shall be required to report unpaid dues to micro and small enterprises in Form 3CD of the Tax Audit Report. The assessee shall be required to add back to its total income the disallowance reported in Form 3CD of its Tax Audit Report. Accordingly, such assesse will be required to file its Income Tax Return (ITR), failing which the income-tax department through the Centralised Processing Centre (CPC), Bengaluru, shall add back the disallowance and recompute tax liability while processing the ITR.
What is the timeframe for payments under Section 43B(h)?
Large enterprises or entities are obligated to pay Micro, Small and Medium Enterprises (MSMEs) within 45 days, depending on the presence of a written agreement. In the absence of a written agreement, payment is required to be made within 15 days. If there is a written agreement, payment shall be made as per the agreed-upon timeline, but not exceeding 45 days.
How to ensure compliance with Section 43B(h)?
Adhering to Section 43B(h) requires enterprises or entities to adjust their payment processes and ensure they have the necessary documentation and systems in place to verify MSME registration status and track payment deadlines accurately.
Due diligence in terms of awareness and understanding of these requirements is fundamental to navigating the compliance landscape successfully.
Section 43B(h) of the Income-Tax Act (ITA), 1961, introduces a significant compliance challenge for entities. However, with a clear understanding of the provision and a proactive approach to managing vendor payments, enterprises can navigate these requirements successfully. The provision, while contentious, highlights the significance of supporting the MSME sector, a critical component of the Indian economy. With further clarifications emerging from the government, businesses should keep themselves informed and adaptable to remain compliant and ensure positive vendor relationships.
Are there any penalties for non-compliance with Section 43B(h)?
In case outstanding payments are not made within the prescribed time limit, which cannot exceed 45 days, then that outstanding payable amount shall be added to the taxable income of the taxpayer. The taxpayer has to bear the income-tax liability on the respective outstanding amount. The assessee gets a deduction in the previous year where payments is made.
In case the business enterprise does not make payments to Micro, Small and Medium Enterprises (MSME) in the above prescribed period, then it has to make payment of compound interest at monthly interests to the supplier at three times bank interest as same is notified by the Reserve Bank of India (RBI).
Can payments made after the due date be carried forward for deduction?
Payments that go beyond the specified time limit under Section 15 of the Micro, Small and Medium Enterprise Development (MSMED) Act. 2006, are covered under clause (h) of Section 43B and are allowed as deductions only upon ‘actual payment’.
Is Section 43B(h) applicable to traders?
No, as per the Office Memorandum dated 01.09.2021, retail and wholesale trade MSMEs are excluded. A Supplier who is a micro or small enterprise cannot be treated as a “Supplier” for section 15 and section 43B(h) purposes if his Udyam Certificate shows his activity as only a trader.
What is appointed day?
“Appointed day” means the day immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier
Is registration on Udyam portal compulsory?
No, the registration is not compulsory. However, a Declaration from supplier also be considered for recognising the Micro and Small Enterprises for this purpose of the Section.
What is the method to verify the Udyam Registration Number provided by the Supplier?
Through the MSME Portal, one can verify MSME registration and the type of enterprise (Micro / Small/ Medium) using the registration number provided by the supplier in the following: https://udyamregistration.gov.in/Udyam_Verify.aspx
What is the limit specified in section 15 of MSMED Act?
The time limit specified in section 15 is, In case there is no written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
Deepak Kumar Singh Founder & Senior Business Consultant Singh and Associates With over 6 years of comprehensive experience in the fields of taxation, accounting, and corporate law, Deepak Singh is the founder and senior consultant at **Singh and Associates**, a leading advisory firm providing a wide range of business services. Over the years, Deepak has built a solid reputation for his expertise in complex tax issues and his commitment to delivering practical, effective solutions to both businesses and individuals. Deepak’s core specialization lies in **GST (Goods and Services Tax)**, **Income Tax**, and **litigation-related matters**. His deep understanding of these areas allows him to assist clients with tax planning, compliance, and dispute resolution. He has successfully represented numerous clients in tax-related audits and legal proceedings, ensuring they navigate the intricate landscape of tax laws with ease and stay fully compliant with the latest regulations. Beyond taxation, Deepak has gained significant experience in **company incorporation** and **compliance management**. He provides end-to-end support for businesses, helping them with the process of establishing a legal entity, ensuring proper registration, and adhering to the necessary corporate governance and statutory compliance requirements. His expertise helps companies maintain smooth operations by staying on top of regulatory changes and fulfilling their legal obligations. In addition to his taxation and corporate services, Deepak has an in-depth understanding of **labor law litigation**, where he assists businesses in managing employment-related disputes. Whether handling issues related to labor contracts, employee disputes, or ensuring compliance with labor laws, Deepak helps businesses navigate these challenges to avoid potential risks and liabilities. Deepak is also highly experienced in **transfer pricing**, offering businesses advisory services on international transactions and cross-border taxation. He ensures that clients maintain compliant and tax-efficient pricing structures, minimizing their exposure to risks in the global market. As the founder of **Singh and Associates**, Deepak takes a client-centric approach, offering personalized, strategic guidance to address each client’s unique needs. His proactive approach, combined with his ability to translate complex tax and legal concepts into actionable advice, has earned him the trust of clients across various sectors. Known for his attention to detail and comprehensive knowledge of business law, Deepak is committed to providing results-oriented services that help businesses achieve financial growth while ensuring regulatory compliance. His firm, **Singh and Associates**, has established itself as a reliable partner for businesses seeking expert guidance on taxation, legal matters, and corporate compliance. Deepak is dedicated to staying updated with the latest developments in tax and business law. His ongoing commitment to professional growth ensures that Singh and Associates remains at the forefront of industry trends, offering innovative and compliant solutions to meet the evolving needs of businesses in today’s competitive landscape.