Introduction
The government recently introduced a new act under Section 43b(h) of the Income Tax Act to facilitate the growth of the MSME sector in India. According to this latest act, any money owed to MSMEs should be paid within the agreed-upon timeline. This provision ensures that the MSMEs are liquid enough and have enough cash to sustain themselves. This provision envisages an open, transparent, and compliant environment for India’s MSME sector. let us know more about this act-
What is Section 43b(h)?
Section 43b(h) is an MSME delayed payment act, which states that any sum of money owed for any goods supplied or services delivered by an MSME 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.
What constitutes an MSME?
Depending upon the turnover limit, different enterprises are classified as different types under the umbrella term MSME.
- A micro-enterprise is an enterprise with an investment in plant and machinery at most of one crore, and the turnover should be less than five crore.
- A small enterprise has an investment in plant and machinery of at most ten crores, and the turnover should be at most 50 crore rupees.
- A medium enterprise has an investment in plant and machinery that should be less than fifty crores & turnover should be at most two hundred and fifty crore rupees.
These limits are defined in the MSMED Act of 2006. Along with these, the MSMEs should also be registered in the UDYAM portal started by the government.
The effective date of Section 43b(h)
Section 43b(h) of the income tax has been in effect since April 1, 2024. It applies to the returns filed in the assessment year 2024-25.
Section 43b(h) MSME amendment applicability
The new income tax regulation clause section 43b(h) applies to any enterprise buying goods or services from any enterprise registered in UDYAM. It follows the provisions defined under the MSMED Act, 2006. The buyer’s registration on the UDYAM portal is not mandatory under the MSMED Act 2006.
For example, if a company XYZ buys goods or services from an MSME company registered in the UDYAM portal under the MSMED Act. Then, 43b(h)of the Income Tax Act applies to the buyer as the supplier is registered under the MSMED Act.
Applicability of Section 43b(h) MSME act on traders
Wholesale and retail traders can register on the UDYAM portal to benefit from priority sector lending. Still, the 43b(h )of the Income Tax Act is not applicable for dues owed to traders according to the MSMED Act’s definition of MSMEs. According to the definition, retail and wholesale traders do not qualify as MSMEs because it applies to Manufacturing and services Providers Only.
The timeline of payment to MSMEs
If the payment timeline has been set under an agreement
- The payment should be made on the due date mentioned in the agreement between the buyer and the MSM enterprise.
- The payment should be made within 45 days from the acceptance of the actual delivery of goods or services rendered.
If the buyer raises any complaint within 15 days of the actual delivery of goods or services, then the “day of acceptance” will be the day the objection is settled by the MSME.
If the payment time is specified in the agreement
Payment should be made to the MSMEs within 15 days of the buyer’s acceptance of goods or service rendering.
Penalties for delayed payment
- A buyer who fails to pay the MSME within the specified time under Section 15 for MSME interest rate for delayed payment will have to pay a compound interest three times the bank rate notified by the RBI.
- The date of paying the interest will be determined based on the date mentioned in the agreement or the day immediately following the expiration of 15 days.
Implication of section 43b(h) on GST
GST claimed as Input Tax Credit (ITC)
The buyer claims the GST paid on purchases of goods and services from MSME as an ITC or Input Tax Credit. In this situation, when claiming deductions under Section 43B(h), the calculation is solely based on the base amount, excluding the Goods and Services Tax (GST). If the base amount that is supposed to be paid to MSME is delayed beyond the agreed-upon deadlines, only the base amount is disallowed as a deductible expense until the payment is made to the MSME.
GST not claimed as Input Tax Credit
There is also a situation where the enterprise treats the entire amount, including the GST, as an expense claiming Input Tax Credit (ITC). In this situation, the total amount, including GST, becomes a Section 43b(h) provision. If complete payment is not made to the MSME within the timeline, the entire sum is disallowed as a deductible expense until the payment is made.
Benefits of the section 43(b)h rule
MSME 43b(h) extended payment act provides several benefits to MSMEs and big corporates.
Promotes timely payments to MSME
The act motivates large companies and buyers to settle their dues with MSMEs within a specific period agreed by both parties in a written agreement. This promotes liquidity in the MSME sector, prompting them to invest more.
Strengthening the position of MSME
This act empowers the MSMEs to negotiate a contract from the position of power, giving them more autonomy to negotiate better payment terms with larger companies and entities. MSMEs now have assurance that they will receive their payment within a time and have better bargaining power over how much time they want to finish the work.
Minimising disputes related to payments in the MSME sector
The section ensures that the MSME receives the payment promptly, reducing legal conflicts and disputes arising due to delays in payments or no payments and saving both the time and resources of MSMEs and larger businesses.
Better Tax planning for Big corporates
Large enterprises or corporate companies can claim a deduction for payments made to MSMEs in the same year following the timeline given by Section 43b(h) act. This adherence to the timetable allows for better tax planning while ensuring that MSMEs get timely payments.
Creating an Environment of Compliance and Transparency
The Income Tax Section 43B(h) encourages transparent financial practices and regulatory compliance, promoting a responsible and ethical business environment. It compels large organisations to maintain accurate records and follow the rules to create a complacent and transparent ecosystem.
Conclusion
The introduction to Section 43B(h) act paves the way for a thriving MSME sector. This regulation, emphasising timely payment, ensures a steady cash flow for MSMEs.The act promotes transparency and compliance for MSMEs, making them more confident while ensuring timely payment and tax compliance. This initiative promises to empower MSMEs to reach new heights, drive economic progress, and cement India’s position as a global manufacturing and entrepreneurial hub.
Frequently Asked Questions(FAQs)
What is meant by the “appointed day”?
Appointed day is the day immediately following the expiration of the 15 days from the date when the buyer either formally accepts or is considered to have accepted the goods or services provided by the supplier.
What is the time limit for making payments to MSME as mentioned in the MSMED Act?
According to the MSMED Act, if there is no agreement on the timeframe of payments, then the buyer has to make the payment within 15 days. But if there is a written agreement with a mutually agreed upon timeline, the buyer must adhere to the timeline in the agreement.
Is payment made to the traders also fall under Section 43b(h)?
No. The payment made to the trader won’t be included in section 43b(h) because they are not the manufacturer of the goods and services. Further traders can register in the UDYAM portal but do not fall into the definition of MSME given by the Ministry in the MSMED Act.
What is the UDYAM portal?
UDYAM portal is a digital platform created for MSMEs, where all the MSMEs who fall under the definition of MSME given in the MSMED Act must register.
Is the UDYAM portal registration mandatory for MSMEs?
No, the UDYAM portal registration is not mandatory. However, a declaration from the supplier recognising them as an MSME supplier is enough to identify the entity as a Micro or Small Enterprise.
