The new income tax section – to settle MSME bills within 45 days
What is section 43B?? It relates to the all Business and Professions, in respect of Certain Liabilities in the nature of Statutory Payments for the year when remained unpaid on at the end of the financial year.
As per this Section, following deductions falls under the criteria:
- Any tax, duty, cess or fees paid/payable to the Govt. (State and Central) under any law in force is allowed as a deduction when it is paid, including TDS, GST, Customs Duty or any other taxes or cesse.
- Contribution to Provident Fund etc.: contribution by the employer to any employee’s provident fund, superannuation fund and gratuity fund
- Bonus or commission to employees- this amount should be the actual bonus/ commission paid to employees (except dividend payable to Shareholders).
- Interest on borrowings from Public Financial Institutions or State Financial Corporation as per the conditions of such loan (except interest credited to the Loan Account)
- Interest on Loans and Advances to Scheduled Bank as per the conditions of loan (except interest credited to the Loan Account)
- Encashment of Leaves to the employees by the employer
- Payment to Indian Railways
Such statutory payments can be claimed as deduction from the Business/Professional Income only when actual payment is done. So such liability, if remains unpaid at the time of filing the ITR for the year, will be added to the Business/Professional Income of the assessee.
Newly inserted clause (h) to Section 43B – effective from 01.04.2024 :
The Govt. of India, in a wellcome step, to encourage Prompt Payments to Small Traders by the Business Enterprises (i.e. Manufacturers and Distributors), clause (h) has been inserted to the Section 43B, which states that if the dues towards small traders (those registered under MSME) is not made within the time limit provided (45 Days), the deduction of the same will be disallowed. The Federation of Indian Micro and Small & Medium Enterprises thinks this rule could really help small businesses.
Thus, settlement of Unpaid Bills to MSME Registered Parties within 45 days from the Receipt of such Bill has become mandatory. However, the rule exempts the assessee having written agreement providing condition that clearance of payments exceeding 45 days with the MSME registered traders.
Section 43B(h) provides that any sum payable by an assessee to a ‘micro enterprise’ or a ‘small enterprise’ beyond the time (“Specified time”) specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) will be allowed only in the year in which such sum is actually paid.
Seperate provisions for timely payment to MSMEs as well as Interest payable for delay in payment to MSME Units are made in the MSME Act also.
However, the Provisions of the clause (h) are not applicable to the assessee opting for Presumptive Taxation, which allows the assessee to file ITR by showing Business Income at certain Percent Age of the Annual Turnover/Gross Receipts of the Business as per Section 44AD/44ADA/44AE etc of the Income Tax Act.
Who are MSME Units?
As per Notification No. 2119(E) dated 26.06.2020 issued by Ministry of Micro, Small and Medium Enterprises, business unit can be classified in two catagories as under:
Micro enterprise: An enterprise having investment in plant and machinery or equipment less than Rs. 1 Crore and Turnover not exceeding Rs. 5 Crore.
Small enterprise: An enterprise having investment in plant and machinery or equipment not exceeding Rs. 10 Crore and Turnover not exceeding Rs. 50 Crore.
Sparked much chaos in the Business Community:
It is important to note that clause (h) is excluded from the First proviso to Section 43B, thus it has created a little worry in Business Enterprises that the entire Payment will be disallowed, even if such payment is made paid before the return filing due date but after 45 days.
If a big company doesn’t pay a small business within 45 days, it can’t claim that payment as a business deduction and ultimately result in Additional Tax Liability on the same. Concerns have been also raised that Large Scale Businesses may avoid dealing with small suppliers and service providers those are registered under MSME and prefer those Traders that are not registered with MSMEs. It might make big buyers treat small suppliers unfairly and prefer ones that aren’t officially registered with MSME.
Our Suggestions:
The Govt. has not accepted the request for Postponement of the Rule by the Stack Holders. So, the assessee should consider the Rule as effective one and plan for clearing any dues. We recommend the taxpayers to verify such liabilities and if payment is due to MSMEs, it is advised to settle them before 45 days to avoid any disallowance under Section 43B of the IT Act.