Introduction

The Finance Act 2023 introduced a new provision, Section 43B(h), mandating that payments made to Micro and Small enterprises for supplied goods or rendered services can be claimed as deductions in the financial year they are paid, provided these payments are made within the timeframe specified by the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006.

This legislative update is designed to mitigate working capital shortages faced by the MSME sector and encourage timely compensation to micro and small enterprises.

Applicability:

1. It is applicable from FY 2023-24 (AY 2024-25)
    
2. It is Applicable on only Micro and small enterprise and not Medium Enterprises (Micro Enterprises are those having investment in Plant and machinery not exceeding 1 Crore and Turnover not exceeding 5 Crore and Small Enterprises are those having Investment in Plant & Machinery not exceeding 10 Crore and Turnover not Exceeding 50 Crore).
    
3. It applicable to MSMED registered Enterprises who are registered under Udyam Aadhar having Udyog Aadhaar Number (UAN).

Exceptions:

1. It is not applicable on due outstanding to Traders even if registered under Udyam Scheme because the traders are entitled to Udyam registration only for the benefit of Priority Sector Lending.
    
2. Section 44AD & 44ADA overrides sections 28 to 43C. Therefore, this disallowance is not applicable to person filing returns under section 44AD or 44ADA.
    
3. It is not applicable on Opening Balances (as per MSMED Act)

Payment Time limit with Examples:

MSME 45 days payment rule – Explained situations

1. Where Supplier and Buyer have no agreement for the period during which payments are to be made:

The payments have to be made within a period of 15 days from the date of the delivery of the goods or services.

So, if Delivery was made on 01.01.2023, payment is to be made by 15.01.2023

2. Where Supplier and Buyer have an agreement for the period during which payments are to be made and such agreed period is more than 45 days.

The payments are to be made within a period of 45 days from the date of the delivery of the goods or services.

So, if Delivery was made on 01.01.2023, payment is to be made by 15.02.2023

3. Where Supplier and Buyer have an agreement for the period during which payments are to be made and such agreed period is more than 15 days and less than 45 days.

The payments are to be made within the agreed period from the date of the delivery of the goods or services.

So, if Delivery was made on 01.01.2023, and the agreed period of payment is 30 days then payment is to be made by 30.01.2023

Consequences:

1. Expense will be added in Income and will be taxable if payment not made within prescribed time. (As per Section 43B(h) of Income tax act).
    
2. Interest will be payable 3 times more than the Interest rate prescribed by RBI (As per MSMED Act)
    
3. For Service provider registered under MSMED Act for whom TDS not deducted disallowance will be as per section 43B(h) and not 43(i)(a). but disclosure is required under 43(i)(a).
    
4. For the Interest payment made it will not be allowed as deduction under Income tax.

Advice/Recommendation:

GetMyCA Consultants advises you to obtain MSME certificates from all the vendors registered under MSMED Act. Execute agreements with MSME vendors specifying payment terms/period or issue purchase orders mentioning specifying payment terms/period. Make payments within timelines as mentioned above. Also, mention your MSME Udyog Aadhar number (UAN) on all the invoices.