45-Day Payment Rule to MSMEs under Section 43B(h) of Income Tax Act

45-Day Payment Rule to MSMEs under Section 43B(h) of Income Tax Act

45-Day Payment Rule to MSMEs under Section 43B(h) of Income Tax Act

The MSME enterprises, especially micro and small enterprises faced significant delays in receiving payments. To mitigate this difficulty, the Indian Government has made significant amendments under Section 43B(h) of the Income Tax Act, 1961 by incorporating provisions for disallowances for delay in payments to micro and small enterprises. Let’s understand in detail what are these provisions, popularly known as the 45-day payment rule to MSMEs and the grey areas surrounding them.

What is MSME Section 43B(h) of the Income Tax Act, 1961?

Section 43B(h) of the Income Tax Act, 1961 lays down certain scenarios whereby businesses can claim deduction only on the basis of actual payments. Most businesses follow the accrual method of accounting whereby the deduction related to any expense can be claimed when the expense was actually incurred irrespective of whether the payment was actually made or not.

However, in the case of Section 43B, the section states certain scenarios whereby the deduction related to certain expenses will be allowed only if the payment was actually made. If the payment is not made as per the provisions, then such expenses will be disallowed. The deduction for such expenses can then be claimed in the year in which the payment was actually made.

What is the Provision Under MSME Section 43B(h)?

Following is the bare provision of MSME Section 43B:

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(h) 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),

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

As per clause 43B(h) above, if the assessee has any payment due to a micro or small enterprise, then the deduction for such expense can be claimed only if it is paid within the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006. The maximum time limit set here is 45 days. The above provision will come into effect from 1st April 2024 i.e., AY 2024-25 or FY 2023-24.

Definition of Micro and Small Enterprises

Here’s how the micro and small enterprises are defined under the MSME Act:

Type of Entity (whether Manufacturing or Service Enterprise) Investment in Plant and Machinery Turnover
Micro Enterprise Not more than Rs. 1 crore Not more than Rs. 5 crores
Small Enterprise Not more than Rs. 10 crores Not more than Rs. 50 crores

Important FAQs Relating to MSME section 43B(h) of Income Tax Act

There are certain confusions relating to Section 43B(h) of the income tax. Following are the FAQs that solves the major queries of businessmen regarding the 45-day payment rule for MSMEs:

Q: Whether the vendor should be registered as an MSME enterprise?

A: The MSMED Act considers suppliers for the purpose of providing benefits under the income tax law. Section 2(n) defines the ‘supplier’ as the micro or small enterprise that has obtained the UDYAM registration. Therefore, it should be noted that only the vendors that have obtained UDYAM registration shall be considered as the supplier.

Q: Whether the traders are covered for the purpose of this section?

A: The above 45-day payment rule to MSMEs primarily applies to the MSME enterprises that are engaged in manufacturing or the provision of services. As per Para 2 of Office Memorandum No. 5/2(2)/2020/E/P&G/POLICY dated 2-7-2021 issued by the Central Government, retail and wholesale traders were primarily allowed MSME registration solely for the purpose of accessing Priority Sector Lending (PSL) benefits. The other benefits provided, including provisions relating to delay in payments under the MSMED Act, 2006 are excluded. Therefore, they cannot be regarded as suppliers if the UDYAM certificate shows them as traders. While there are varied opinions as to whether vendors who are traders can claim the benefit of this provision, businesses should consider traders as part of this amendment to avoid any potential income tax notices and disallowances in the future.

Q: Will the GST portion also be disallowed as expenditure under section 43B(h)?

A: As the GST portion represents the indirect tax and is claimed as credit by the recipient, therefore, it is not normally claimed as expenditure in the P&L. Consequently, the disallowance shall represent the amount excluding the GST portion.

Q: Will the supplies made before UDYAM registration be considered?

A: Only the supplies made after the UDYAM registration shall be considered as the vendor will be considered as the supplier under the MSMED Act only if they have obtained UDYAM registration.

Q: Suppose a payment is outstanding as on year end (i.e., 31-03-2024) but within the period under the MSMED Act. Will the payment be disallowed if it is paid in the next financial year 2024-25 beyond the period of MSMED Act?

A: If any amount is outstanding as on the year-end and paid in the next year after the period prescribed in the MSMED Act, such amount shall be disallowed while computing the business income for the financial year 2023-24. The deduction for this expense can be claimed in the year in which the payment is actually made i.e., FY 2024-25.

Q: If the goods were purchased on 01-04-2023 and payment was done on 31-03-2024, will it be disallowed under section 43B(h)?

A: The expense will not be disallowed in the present case. Even though the payment was made after the time limit specified under Section 15 of the MSMED Act, it will not be disallowed as it was paid within the same financial year and was not outstanding as on the year's end.

For more such useful information, updates and implications, feel free to contact the ASC Group.


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