SECTION 43B AMENDMENT: MSME DUES DISALLOWANCE
POST BUDGET, 2023
AUTHOR :JAINASHWIN05
https://taxguru.in/chartered-accountant/section-43b-amendment-msme-dues-disallowance-post-budget-
2023.html
Amendment in Section 43B of Income Tax Act, 1961 (Certain expenses to be allowed on payment basis) by
insertion of new clause (h) with effect from 01.04.2024.
Introduction: The recent amendment to Section 43B of the Income Tax Act, effective from April 1, 2024,
introduces a new clause (h) with a specific focus on Micro and Small Enterprises (MSMEs). This socio-
economic welfare measure aims to ensure timely payments to these entities by modifying the deduction
provisions outlined in Section 43B.
Brief Background: –
The Finance Bill, 2023 introduced a significant amendment to the Income Tax Act, 1961 by adding a new clause
(h) to Section 43B. This inclusion is designed as a Socio-Economic Welfare Measure, primarily targeting Micro
and Small companies to ensure timely payments. Section 43B of the Act currently outlines specific deductions
that are permissible only upon actual payments.
The proposed amendment, reflected in the new Section 43B (h), specifies the following:
“Section 43B (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.”
Upon a thorough examination of the language used in Section 43B(h), it is evident that the amended provisions
will exclusively apply to micro and small enterprises. Medium enterprises are explicitly excluded from the scope
of these provisions. This interpretation is crucial in understanding the targeted applicability of the amendment,
which focuses specifically on the requirements of micro and small businesses, excluding those categorized as
medium enterprises.
This clause explicitly mandates that payments to Micro and Small enterprises must be made within the
timeframe specified in Section 15 of the Micro, Small, and Medium Enterprises Development Act, 2006.
Adherence to this stipulated time duration is crucial for qualifying for the deduction of the sum owed to these
micro and small enterprises. This amendment aims to promote timely payments and support the economic
welfare of Micro and Small businesses.
The mentioned amendment exclusively pertains to micro and small enterprises. But it is crucial to note the
definition of “Enterprise” as per the MSMED Act. So let us understand the definition of Enterprise as per
MSMED Act.
> Enterprises is defined as follows:
As per Section 2(e) of the MSMED Act ‘enterprise’ means an industrial undertaking or a business
concern or any other establishment, by whatever name called, engaged in the manufacture or
production of goods, in any manner, pertaining to any industry specified in the First Schedule to the
Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service
or services. (The industries which are specified in the First schedule are separately attached for your
reference)
> Classification of Micro, Small & Medium Enterprises as per Section 7 of MSMED Act, 2006
As per section 7 of the MSMED Act the Central Government may, for the purposes of the MSMED Act,
by notification, classify any class or classes of enterprises, whether proprietorship, Hindu undivided
family, Association of persons, Co-operative society, Partnership firm, Company or Undertaking, by
whatever name called, into a Micro, Medium or Small enterprise.
Section 7 of the MSMED Act itself classifies enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the industries (Development and
Regulation) Act, 1951 and also enterprises engaged in providing or rendering of services an enterprise
may classified as Micro, Medium or Small enterprise on the basis of investment in equipment.
Classification Micro Small Medium
Investment in P
Investment in Plant & Machinery
Machinery or Equip
Investment in Plant & or Equipment: –
Machinery or Equipment: – More than 10 Crore
Manufacturing Enterprises & More than 1 crore up to Rs. 10
Rs. 50 crores &
Enterprises rendering services Up to Rs.1 crore & Annual crores & Annual Turnover: –
Turnover: – More
Turnover: – Up to Rs.5 crores More than 5 Crore up to Rs. 50
50 crores but up to
crores
crores
It is clarified by Explanation 1 to the 7(1) of MSMED Act that in calculating the investment in plant and
machinery, the cost of pollution control, research and development, industrial safety devices and such other
items as may be specified, by notification, shall be excluded.
Extract of Relevant Provisions of MSMED Act,2006
> 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 such objection is removed by the supplier.
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.
> “Appointed day” means the day following immediately after the expiry of the period of fifteen days
from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from
a supplier
Section 15 of MSMED Act: Time Limit of payment to MSMED Supplier
Scenarios explaining the above amendment are as follows:
Situation Tax consequence Rationale
1. X Pvt Ltd. purchases goods worth Rs. 15 lakhs
from Y Pvt Ltd. Y Pvt Ltd. is an small enterprise
as per Section 2 of the MSMED Act
(a) X Pvt Ltd. makes payment within the time (a) Entire sum will be Because payment has been made within
allowed under Section 15 of the MSMED Act allowed as purchases the time limit
(b) X Ltd. makes payment after the time allowed
(b) Entire sum will be Because payment has been made in the
under Section 15 of the MSMED Act but within
allowed as purchases year of incurring expenses.
previous year 2023-24.
(c) Payment will be
(c) X Ltd. makes payment in year 2024-25 after disallowed in the year Because benefit of first proviso to
the time allowed under Section 15 of MSMED 2023-24 but will be section 43B will not be available in this
Act but before due date of ITR allowed in the year 2024- situation.
25
2. X Pvt Ltd engaged the audit services of Mr. Y.
Audit fees will be allowed in the year
As per the agreement the fees were to be paid
2023-24 because payment has been
after completion of the audit within 15 days. X
No disallowance under made as per agreement and period of 15
Pvt Ltd makes provision for audit fees as on 31-3-
section 43B called for days will be counted from day of
2024 for Rs. 1,50,000. The audit gets completed
acceptance of service which in this case
by 31.08.2024 and payment is made within 15
is 31.08.2024
days from 31.08.2024.
In a nutshell,
If agreement specifies 20 days, then payment is to be made within 20 days of Invoice.
If agreement specifies 60 days, then payment is to be made within 45 days of Invoice.
If no agreement than within 15 days of invoice.
> Case Study to understand impact of above amendments.
1. Net Profit for the year AY 2024-25 (FY 2023-24) is 5,00,000/-
2. Amt outstanding towards Creditors (Micro & Small Enterprises) due more than 45 days Rs.
15,00,000/- out of which Rs.5,00,000/- was paid before 31.03.2024 and Rs.7,00,000/- was paid
before filing Return of Income and balance amount of Rs.3,00,000/- was outstanding on the date of
filing return of income.
Due to the outstanding amount payable to Micro and Small Enterprises exceeding 45 days, the said amount is
subject to being added back to the net profit. This adjustment is necessitated by the disallowance under Section
43B, resulting from the insertion of the new section effective from April 1, 2023.
No. Details Amt
1. Net Profit for the AY 24-25 5,00,000/-
Add: – Amt payable to Creditors (Micro & Small Enterprises) due more
2. 10,00,000/-
than 45 days (Note 1)
Total Net Profit 15,00,000/-
Tax on Total income (@ 31.20% for Partnership Firm/LLP) 4,68,000/-
Note 1: Here amount payable to MSME creditors which is outstanding for more than 45 days as on 31st March
and same is paid before due date of furnishing its Return of Income i.e Rs. 7,00,000/- will be disallowed as
clause (h) of section 43B does not fall under the proviso of section 43B. Hence payment made after year end i.e.
31st march of previous year but before due date of furnishing return of income will be allowed in the year of
payment and not in year when it accrued.
Proviso of section 43B states that deduction on accrual basis is allowed, if the amount is paid by due date of
furnishing of the return of income.
Recommendation regarding Classification of MSME-
The supplier strongly advises all business entities to obtain an annual declaration confirming their
classification as micro or small enterprises under the Micro, Small, and Medium Enterprises Development
Act, 2006. This declaration is instrumental in ensuring compliance with relevant regulations and facilitates
purchasers in identifying the enterprise’s status.
Additionally, it is recommended that Micro and Small enterprises include a specific note on their invoices,
explicitly stating their enrollment under the Micro, Small, and Medium Enterprises Development Act,
2006. This practice is aimed at simplifying the compliance process for purchasers, making it clear that the
invoicing entity qualifies as a micro or small enterprise under the mentioned Act. Such transparency aids
purchasers in meeting their compliance obligations with confidence.
Since it is the liability of the assesse to identify their supplier’s status, therefore, written declaration from
all suppliers of goods or services as to their status of registration under the MSMED Act should be sought.
If they claim their status as ‘registered’, also obtain a copy of their registration certificate from which their
category as “micro”, “small” or “medium” may be established.
Hence, it is imperative for the client to accurately maintain a distinct list of creditors categorized as
MSME (Micro Small and Medium Enterprises) from the beginning of the fiscal year. This entails
acquiring certificates or declarations from creditors confirming their status under the MSMED Act.
This proactive approach is essential to mitigate any potential disallowances related to delayed payments to
MSME creditors, as stipulated by the recent amendment.
Conclusion:
In conclusion, the Section 43B amendment of 2024 has a direct impact on MSMEs, encouraging timely
payments for socio-economic welfare. The article emphasizes the need for businesses to understand and comply
with the revised provisions, especially regarding the classification of enterprises under the MSMED Act.
Practical recommendations, including obtaining annual declarations and maintaining a distinct list of MSME
creditors, are crucial for navigating the complexities introduced by the amendment.
The inclusion of case studies provides practical insights into the tax consequences, enabling businesses to
strategize and align their payment practices with the amended regulations. Staying informed about the Section
43B amendment is essential for businesses to optimize financial management and ensure compliance with the
evolving tax landscape.
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Disclaimer: Please note that the views expressed in this article are the personal opinions of the authors and do
not represent a view of any organization or any other person. No assurance is given if such view is acceptable by
any judicial or tax authorities. It is advisable to undergo independent research before reaching to any conclusion.
This article is contributed by CA Ashwin Jain, Partner at ATMS & CO LLP, CA Ayushi Saini Manager at
ATMS & CO LLP and inputs from Article Assistant Ankita Kewalramani.
