PAYMENTS TO MSME (SECTION 43B(H))

Lets first Understand the MSME definition –

In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

Revised MSME Classification
Composite Criteria : Investment and Annul Turnover
Classification		Micro	Small	Medium
Manufacturing & Service	Investment	< Rs. 1 Crore	< Rs. 10 Crore	< Rs. 50 Crore
Manufacturing & Service	Turnover	< Rs. 5 Crore	< Rs. 50 Crore	< Rs. 250 Crore

Note: Turnover with respect to exports will not be counted in the limits of turnover for any category of MSME units.

Clarification for Sec.43B(h) of I T Act,1961 for payment to MSME:-

Clause (h) of section 43B says –

“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″ shall be allowed only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum is incurred by the assessee according to the method of accounting regularly employed by him.

The proviso to section 43B which extends the time limit for allowance of deduction if actual payments are made up to the ‘due date’ for furnishing the return under section 139(1), would not apply in respect of the payment referred to in clause (h) of section 43B.

It is in this background, the taxpayers have to take precautionary measures to avoid disallowance of expenditure which may be outstanding (to MSME units) as on 31st March, 2024 representing the expenditures of the financial year 2023-24. Thus, one would hasten to add that any liability which was outstanding in respect of the period prior to 01.04.2023 would not be hit by clause (h) of section 43B even if it is outstanding as on 31st March, 2024 or even subsequent periods. Such outstanding amounts may be due to pending disputes with respect to those supplies or services between the parties and agreed for settlement of dues upon resolution of dispute or any other issue between them.

Lets Understand the allowance / disallowance with some cases –

Case	Date of Acceptance (purchase OR availing service)	Date Agreed (mentioned in Invoice OR Agreement)	Date of Payment
I	Prior to 01.04.2023	Not relevant	Not relevant
II	15/05/2023	25/05/2023	25/05/2023
III	15/07/2023	15/09/2023	14/09/2023
IV	17/03/2024	27/04/2024	26/04/2024
V	19/03/2024	–	02/04/2024
VI	19/03/2024	–	09/04/2024
VII	19/03/2024	31/05/2024	31/05/2024
VIII	31/03/2024	14/05/2024	16/05/2024

Case- I

Here, the purchase done prior to 01.04.2023 hence provision of Sec.43B(h) is not applicable.

Case- II

Here, the payment has been made by the buyer to the supplier within the date agreed. Therefore, the entire amount will be allowed in F.Y.2023-24.

Case- III

Here, the agreed date between the buyer and the seller exceeds forty- five days. Therefore, only the period up to 45 days from the date of acceptance will be considered. Payment is made on 14/09/2023, which exceeds the 45 days limit (section 15 of MSMED Act.) from the date of acceptance, i.e. 15/07/2023.

Therefore, interest on the same, is payable to the supplier @ 3 times Repo rate of RBI (Sec.16 of MSMED Act.)(As of now @ 6.50*3=19.50%)

Further such interest will be disallowed while computing income under head PGBP.

However, since there is no amount remaining outstanding as on 31/03/2024, the principal amount will be allowed in F.Y. 2023- 24.

Case- IV

Here, the payment is made within the date agreed, which is within 45 days from the date of acceptance.

Therefore, no interest is payable to the supplier. The principal amount paid will also be allowed in F.Y. 2023-24.

Case- V

Here, since no date has been agreed upon, the payment is required to be made

within 15 days from the date of acceptance (section 15 of MSMED Act).

In this case, the payment has been made within the 15 days from date of acceptance. Therefore, no interest is payable, and the principal amount, even though outstanding on 31/03/2024, will be allowed in the F.Y. 2023-24.

Case- VI

Here, since no date has been agreed upon, the payment is required to be made

within 15 days from the date of acceptance.

In this case, the payment has not been made within the 15 days from date of acceptance. Therefore, interest is payable on the same, and the same will be disallowed. Moreover, the principal repayment will also be disallowed in F.Y. 2023-24, and only be allowed in F.Y. 2024-25.

Alternative View:

There is also an alternative approach to this situation. Some people are of this opinion, that since 15 days are not exceeded as at 31st March, there is no disallowance as on the date. The delay is made only after the year end.

Therefore, the principal repayment must be allowed in F.Y. 2023-24 itself.

Our Opinion:

Assessee should disallow in case of delayed payments in the year in which the purchase/ expense relates to, and allow in the year of payment, to be on a safer side. Moreover, if the assessee opts for the latter option, in that case, the expense will be allowed even if no payment has been made to the MSME vendors. In such a case, the whole purpose of the law will be defeated and it would lead to an absurd interpretation of the law.

Case- VII

Here, the agreed date between the buyer and the seller exceeds forty- five days. Therefore, only the period up to 45 days from the date of acceptance will be considered. Payment is made on 31/05/2024, which exceeds the 45 days limit from the date of acceptance, i.e. 19/03/2024.

Therefore, interest on the same is payable to the supplier and it will be disallowed. Moreover, since there is principal amount remaining outstanding as on 31/03/2024, it will be disallowed in F.Y. 2023-24, and only be allowed in F.Y. 2024-25,

as discussed in the Case VI in detail.

Case- VIII

Here, the agreed date between the buyer and the seller is within forty- five days. But payment is made on 16/05/2024, which exceeds the 45 days limit as well as agreed date from the date of acceptance, i.e. 31/03/2024.

Some Other Points: –

This provision is applicable only when seller is registered under MSME (Udyam).
Here Assessee has choice to govern by provision of MSME or Not.
This provision is applicable even if buyer is not liable for audit.
If Assessee is declaring income under presumptive taxation (sec.44AD) then disallowance of expenses will not come in to picture.
This provision is applicable even if buyer is registered under MSME or Not.

FREQUENTLY ASKED QUESTIONS (FAQs) ON AMENDMENT IN SECTION 43B:

Question 1: When does this amendment come into effect?

Answer: The amendment is applicable from the Assessment Year 2024-25, corresponding to the Financial Year 2023-24.

Question 2: Does it apply to amounts outstanding to micro & small enterprises as of March 31, 2023?

Answer: No, the amendment doesn’t apply to amounts outstanding to micro & small enterprises as of March 31, 2023. Its implementation starts from the Financial Year 2023-24.

Question 3: Is MSMED Act registration mandatory for disallowance under section 43B(h)?

Answer: Yes, only registered micro & small enterprises under the MSMED Act fall under the ambit of section 43B(h). Unregistered suppliers are exempt from this provision.

Question 4: How can one verify if a supplier is registered under the MSMED Act?

Answer: Utilize the MSME Portal to verify registration and enterprise type using the registration number. Post-amendment, many suppliers include their MSME registration number on invoices.

Question 5: What if a supplier fails to intimate MSME registration to the buyer?

Answer: If the supplier doesn’t inform the buyer of MSME registration, no disallowance can occur under section 43B(h) due to the absence of information.

Question 6: Is section 43B(h) applicable to traders with MSME registration?

Answer: No, section 43B(h) doesn’t apply to traders as the definition of enterprise under the MSMED Act excludes them. Retail & wholesale trade MSMEs have limited benefits under the MSMED Act.

Question 7: How does section 43B(h) apply to suppliers engaged in both trading and manufacturing/services?

Answer: In such cases, section 43B(h) can be considered applicable for dues outstanding to such suppliers.

Question 8: Does section 43B(h) apply to outstanding dues for capital expenditure?

Answer: No, as capital expenditure is not an allowable expense under the Income Tax Act, disallowance under section 43B(h) doesn’t apply.

Question 9: How are year-end provisions treated for disallowance under 43B(h)?

Answer: If actual delivery hasn’t occurred by the end of the year, no disallowance can be made under section 43B(h).

Question 10: What happens when a supplier gets paid after 15/45 days but within the same financial year?

Answer: Deduction can be claimed in the same financial year as payment is made.

Question 11: Can deduction be claimed if payment is made after 15/45 days but before filing the return of income?

Answer: No, the benefit of the first proviso to section 43B is not available for dues to micro & small enterprises. Deduction can only be claimed in the year of actual payment.

Question 12: Does section 43B(h) apply to assesses opting for presumptive taxation (44AD/44ADA/44AE)?

Answer: No, section 43B is not applicable to assesses opting for presumptive taxation.

Question 13: Does section 40(a)(ia) (non-payment of TDS) & section 43B(h) apply Simultaneously if neither Payment nor TDS is deducted on amount payable to MSE?

Answer: No, If Amount payable to MSE is liable to TDS and that TDS is also not paid to government then dis-allowance will be u/s 43B(h) only and not under section 40(a)(ia).

Question 14: Does disallowance is to be made on value inclusive of GST or exclusive of GST?

Answer: If Amount payable to MSE is inclusive of GST then dis-allowance will be limited to the amount exclusive of GST because GST was never claimed as expenses so it can’t be dis-allowed as expenses.

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