Section 43B(h), introduced in the Finance Act,2023 to ensure that micro and small enterprises are paid promptly for their Goods & Services. The clause applies to all purchases from MSMEs registered under the MSMED Act of 2006. Medium enterprises, however, are exempt from this clause.

APPLICABILITY: - From 1^st April ,2023 onwards on all Micro & Small Enterprises.

DEFINITIONS

RELEVANT PROVISIONS OF THE MSMED ACT,2006:

Under Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act,2006, the obligation to make payments to micro and small enterprises is set within specific time limits. If a written agreement exists between the parties, the payment must be made within the time limit agreed upon, which should not exceed 45 days. In the absence of such an agreement, the law requires that payments be made within 15 days.

TIME LIMIT FOR PAYMENT TO MSMEs AS PER SECTION 43B(h) OF INCOME TAX ACT,1961: -

Explanation. - For the purposes of this clause -

         I.            "The day of acceptance" means.

·         the day of the actual delivery of goods or the rendering of services; or

·         where any 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 on which the supplier removes such objection,

       II.            "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:"

IDENTIFICATION OF MSMEs

For compliance, businesses must identify whether their suppliers are registered as micro or small enterprises under the MSMED Act,2006. MSMEs are encouraged to indicate their registration status on invoices.

CONSEQUENCES OF NON-COMPLIANCE

Ø     Failure to comply with these payment deadlines leads to the unpaid amount being added to the taxable income of the business in the year of non-payment. However, businesses can claim a deduction for this amount in the year the payment is eventually made.
Delayed payments incur compound interest at a rate three times the bank rate notified by the Reserve Bank of India. This penal interest is not deductible under Section 37 of the Income Tax Act 1961.

CONCLUSION:

Section 43B(h) of the Income Tax Act,1961 is a critical step in safeguarding the interests of MSMEs, ensuring they receive timely payments for their goods and services. It encourages larger businesses to maintain financial discipline in their dealings with smaller enterprises. By understanding and complying with the provisions of Section 43B(h), businesses can avoid potential tax liabilities and contribute to a more robust MSME sector.