Timely Payments to MSME for Deduction under Income Tax Law: Confusion & Clarification
Finance Act – 2023 has added a new clause (h) to section 43B so as to ensure that the payments to micro and small enterprises is done in accordance with the provisions of MSMED Act. Deduction towards expenses shall be available only if the payment to Micro/Small is actually made within the period agreed in writing between the buyer & seller. If there is no agreement in writing then the payment has to be done before the appointed date (i.e., 15 days). If the period agreed in writing is beyond 45 days then the payment has to be done within 45 days only. In the last issue of The Tax Talk, we have discussed various aspects of the new law as contained in section 43B(h). There are lots of confusion & ambiguities. Some of the issues are compiled hereunder in the form of FAQ:
- Applicability to Traders:
I have purchased the goods from an entity who is registered in MSMED Act as a trader (& not as manufacturer or service provider). Whether section 43B(h) will be applicable in such a case also?
Answer: This is the most important issue raised by many. Section 43B(h) is applicable only in respect of amount payable to Micro or Small Enterprises registered as such under the MSMED Act and are engaged as a manufacturers or Service Providers with Turnover less than Rs.50 Crores. Pure Traders (even if Registered under the MSMED Act 2006 or have obtained Udyog Aadhar Number) are not covered in the definition of Micro or Small Enterprises. So, there will be no disallowance u/s 43B(h) if payment to such traders is done even beyond 45 days. One may also refer to the Office Memorandum Dated 01.09.2021 issued by the Ministry of MSME which clarifies that the registration is restricted for priority sector lending only.
- Agreed Period Vs. 15 Days Vs. 45 Days:
I have purchased the goods from micro/small enterprises on 30.03.2024. The payment term as mentioned in the bill and as agreed was 5 days. So, I was required to make the payment on or before 04.04.2024. I paid the amount on 05.04.2024. Will I be eligible for deduction in the FY 2023-24?
Answer: As per section 15 of the MSMED Act, the payment has to be made on or before the date agreed in writing between the buyer & the supplier. If there is no agreement then the payment has to be done before the appointed day i.e., 15 days (which may extend to 45 days if the written agreement provides for payment after 45 days or more).
In your case, the agreed period was 04.04.2024 whereas you have paid the amount on 05.04.20241. So, you will not be eligible for deduction in the FY 2023-24 but will be eligible for deduction in the FY 2024-25.
- Agreed terms of more than 45 days:
I am dealing in seasonal goods. I have purchased the goods from Micro/small enterprises on 01.02.2024 and the payment term is 4 months. Whether I will still be required to make the payment within 45 days despite our written agreed terms?
Answer: No matter that the seller has agreed for the payment terms of 4 months, the payment has to be done within 45 days to avoid the disallowance U/s 43B(h).
- Payment before the due date of filing ITR:
Whether the deduction shall be admissible if the amount is paid before the date of filing the Income Tax Return (ITR)?
Answer: Deduction is admissible only if the payment is either done in the same financial year or within a period of 15 days or 45 days if the same falls after 31st March. Deduction shall not be admissible if the same is paid after the end of the financial year and the period of 15 days or 45 days is over. In such a case, the deduction shall be admissible in the next year when the payment is done.
- Invoice can be considered as Written Agreement?:
The normal payment term is of 15 days which can be replaced by 45 days if there is a written agreement. Whether written agreement is must or optional? Whether it would be sufficient if the payment of 45 days is mentioned in the invoice?
Answer: Written agreement is must for the benefit of 45 days U/s 43B(h). In my opinion, if the invoice mentioned the period of 45 days or more, it would be sufficient to draw inference that there exists a written agreement.
- Non Payment due to disputes:
I have purchased the goods via invoice dated 30/11/2023 where goods were delivered on 02/12/2023 but there were some disputes which got resolved on 25/03/2024. Whether the 15 days or 45 days period will be reckoned from 30/11/23, 02/12/2023 or 25/03/24?
Answer: The period of 15 days or 45 days is applicable from the date of acceptance or deemed acceptance.
Here, “The day of acceptance” means
(a) the day of the actual delivery of goods or the rendering of services; or
(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;
and “The day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;
In your case, if you have made a written objection, the date of acceptance shall be considered as 25/03/24. If no written objection is raised by you then the date of acceptance shall be 02/12/23.
Conclusion:
Every new law comes with a new set of complications and confusions. Section 43B(h) will have many as it will affect each and every business house. Understanding and adhering to the provisions of section 43B(h) is crucial to avoid significant tax liabilities. Businesses must ensure timely payments to Micro/small enterprises, considering the specified timelines and written agreements where applicable. Needless to say, the non-compliance could result in adverse tax implications.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
