Registered Vs. Unregistered MSME: Disallowance for delayed Payment  

Loading

Registered Vs. Unregistered MSME: Disallowance for delayed Payment

 

Query 1]

If a person is a MSME registered enterprise and has supplied marriage cards along with the printing job to another printer who is not a registered MSME and also not under compulsory tax audit. Whether the other person is obliged to pay to the supplier within the time frame of section 43B(h)?

In short, whether the provisions of section 43B(h) is applicable to non-tax audit concern availing services from the MSME registered person.

Again, whether the provisions of Sec 43B(h) is applicable to persons who are under presumptive taxation scheme say Section 44AD, 44AE and 44AF?

Opinion:

Section 43B(h) is newly introduced in the Income Tax Act- 1961 w.e.f FY 2023-24 to ensure timely payment to Micro & Small enterprises. Since it could have significant tax implications, it is important for every taxpayer to ensure that the payment is done within the time period prescribed U/s 15 of the MSME Act. There are a lot of confusions & ambiguities with regard to its applicability & implementation. As far as specific query raised by you is concerned, it may be noted as under:

  1.  Section 43B(h) is applicable on every buyer (or service recipient) whether such buyer is registered under MSME or not or whether such buyer is required to get the books of accounts audited or not. Every buyer, be it a large enterprises, medium enterprises or traders, has to comply with the payment norms stipulated U/s 43B(h) if the seller is a-
    a) Micro or small enterprise;
    b) Not a trader registered under MSME for the purpose of availing credit facilities from the bank.
  2. At the cost of repetition, I may mention that the status of seller is important & needs to be examined for the purpose of applicability of section 43B(h) & not of buyers.
  3. Applicability to Micro or Small enterprises who are not registered under MSME:
    a) Majority of the tax experts believe that section 43B(h) applies solely to purchase/services from registered MSME & not otherwise. The view emanates for the reason that (i) the buyer would get to know about the seller as Micro or Small enterprises only if they are registered under the MSME (ii) Section 43B(h) is aimed to offer the benefit to those MSME which are registered under the MSME Act & not otherwise.
    b) The majority viewpoints may not be so commonly accepted by all the income tax authorities during any proceeding before them. As per the wording used in the Income Tax Act- 1961, Section 43B(h) get attracted on “any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006)”.
    Tax authorities may disallow the amount not paid to unregistered MSME by holding that (i) Section 43B(h) doesn’t explicitly limit its applicability to registered Micro & Small Enterprises (ii) Section 43B(h) refers to MSME Act-2006 only for the purpose of importing the “time limit” in the Income Tax Act & not for any other purpose.
    In short, Income Tax Authorities may apply the literal interpretation of law and may make the disallowance in those cases where the seller is a micro or small enterprises which are not registered under the MSME.
    c) The issue would be full of litigation and controversy. It may open the floodgate of litigation. Till date, there is no FAQ / instruction or circular which is issued by CBDT to clarify the law related to section 43B(h). It would be better if the CBDT comes out with a detailed FAQ/Circular to clarify various such issues in section 43B(h).
    d) Till such clarification / guidelines is issued by the CBDT, taxpayers may place the unregistered MSME at par with registered one.
  4. Applicability to the person covered by presumptive scheme of taxation U/s 44AD, 44ADA or 44AE:
    If the buyer is opting for a presumptive scheme of taxation then the provision of section 43B(h) will not be applicable. In short no disallowance can be done U/s 43B(h) if the buyer has opted for the presumptive scheme of taxation U/s 44AD, 44ADA or 44AE.

 Query 2]

I have a query regarding timely payment to MSME within 15 or 45 days. In the case of one of our suppliers, there is an opening balance as on 01.04.2023 of Rs. 43 Lakh. During the year till 28.02.2024, we have purchased the goods of Rs. 38 Lakh from the said person and paid the amount of Rs. 50 Lakh. Can we say that the outstanding amount of Rs. 31 Lakh is out of the balance of Rs. 43 Lakh as on 31.03.2023?

Opinion:

In the ordinary course of business, payments are generally presumed to follow the First In, First Out (FIFO) principle, where the first payment is considered to settle the oldest bill. However, it’s important to note that there exists no explicit provision regarding FIFO under the Income Tax Law.

If you can provide documents, evidence or communication indicating that the payments made during the year correspond to current year bills, it would be reasonable to consider that the outstanding amount of Rs. 31 lakh is against the balance of Rs. 43 lakh as of March 31, 2023.

[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]

 

 

Menu