Interest on Delayed Payment under Section 16 of the MSMED Act and its Allowability under the IT Act
The MSMED Act, 2006, provides for interest on delayed payments to Micro and Small Enterprises (MSEs). The interest rate is three times the bank rate, compounded monthly.
Section 16 of the MSMED Act
1. Interest on Delayed Payment: A buyer who fails to make payment within the specified timeframe (as per Section 15 of the MSMED Act) will be liable to pay compound interest at the rate of three times the bank rate.
2. Compound Interest: The interest will be compounded monthly.
Section 23 of the MSMED Act and Section 37(1) of the IT Act
1. Disallowance of Interest: The interest on delayed payment will not be allowable as a deduction in the computation of income of a buyer.
2. Section 37(1) of the IT Act: This section provides for the allowability of expenses incurred wholly and exclusively for the purpose of business but interest on delayed payment to MSEs is specifically disallowed.
Analysis of Section 43B(h) of the IT Act
1. Tax Implication: Section 43B(h) provides that any sum payable to an MSE beyond the specified timeframe will be disallowed for tax deduction purposes.
2. Disallowance of Payment*: The payment will be disallowed even if made before the due date of filing the return of income.
Example
Suppose a buyer makes a payment to an MSE on April 15th, which is beyond the specified timeframe of 45 days as per Section 15 of the MSMED Act. In this case:
1. Interest on Delayed Payment: The buyer will be liable to pay compound interest at the rate of three times the bank rate.
2. Disallowance of Interest: The interest on delayed payment will not be allowable as a deduction in the computation of income of the buyer.
3. Disallowance of Payment: The payment will be disallowed for tax deduction purposes under Section 43B(h) of the IT Act.
Conclusion
The MSMED Act and the IT Act provide for interest on delayed payments to MSEs and its disallowability as a deduction in the computation of income of a buyer. Section 43B(h) of the IT Act further emphasizes the importance of timely payments to MSEs. Buyers must ensure compliance with the specified timeframe to avoid disallowance and potential penalties.
