Starting from FY 2024-25, there’s a new payment rule that buyers must adhere to while availing services from Micro, Small and Medium Sized Enterprises (MSMEs).
According to the income tax section 43b h latest news Section 43B of the Income Tax Act, if a larger company does not pay an MSME within 45 days, it won’t be able to avail tax deductions on its taxable income, resulting in a higher tax burden. Also know why income tax return is important for everyone.
This new MSME payment rule has been primarily introduced to speed up payments made to MSMEs. Effective from 1st April, 2024, companies will now be obligated to pay any outstanding debts within the specified time or else there will be a tax liability on the outstanding balance.
Also Know :- What Is GeM? How GeM Portal is Useful for MSMEs in India
Understanding Section 43B(h) for the MSME Payment Rule
The Income Tax Act permits the value to deduct expenses as per their accounting system.
If the value uses a cash accounting system, the deduction ought to be approved based on the actual amount paid.
In case of a mercantile accounting system, the deduction is permitted on an accrual basis.
Now, the Income Tax Act of 1961 lists several costs that are deductible on a payment basis under Section 43B. It is very crucial to know about common mistakes in TAX which each one should know.
Therefore, if the payment is made on or before the deadline for submitting the income return, the tax deduction of the designated expenditures will be permitted even if the value uses the mercantile way of accounting.
However, from now onwards, this will not be applicable to the amount owed to MSMEs.
With the introduction of paragraph (h), the Finance Act of 2023 has added a new provision – any amount owed to a micro- or small-business (MSE) after the deadline outlined in Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) would be tax deductible in the financial year that the money has been paid.
Importance of Section 43B(h)
With the introduction of the MSME payment rule, businesses will now have to pay the amount for the product or service acquired from MSMEs within 45 days. If failed to do so, businesses won’t be able to deduct those expenses from their tax liability.
Therefore, from 1st April 2024, if you are a partnership firm, sole proprietor, or an LLP, you must pay your MSME suppliers within 15 to 45 days if a written contract is in place. The applicability of Section 43B(h) extends to non-registered suppliers as well.
Difference Between Section 43B(h) and 43B
Invoices that are unpaid at year’s end and settled after March 31 of the fiscal year are covered under Section 43B.
Certain provisions of Section 43B permit an accrual deduction of year-end outstanding if the payment is received on or before the ITR filing deadline. As per the recently added clause (h), any amount owed by the assessee to a micro or small firm after the deadline stipulated in Section 15 of the MSME Act has to be deducted in the year it is actually paid, thus allowing flexibility for tax treatment of such transactions.
Impact of Section 43B(h) on MSMEs
Citing a “lack of clarity” on the law’s applicability to traders among other provisions, representatives from the traders’ group CAIT have appealed to Finance Minister Nirmala Sitharaman for a postponement of the section in the Income Tax Act about MSME payment rule till April 2025.
The Clothing Makers Association of India (CMAI) estimates that the modification will cost MSME clothing makers between Rs 5,000 and Rs 7,000 crore in losses during the January–March quarter.
According to the CMAI, retailers have canceled orders with MSMEs and replaced them with non-MSME businesses as a result of the new law.
The retail sector often runs on a credit day cycle for payments that lasts between 90 and 120 days, although occasionally it goes up to 180 days.
Key Takeaway
The introduction of MSME Section 43B (h) is a positive step towards making financial dealings fairer for MSMEs. It encourages bigger companies to prioritize paying small businesses on time, which ultimately benefits the entire business ecosystem. Timely payments by buyers will also encourage transparent and accountable business practices in the MSME sector.
FAQs
- What follows if an MSME is not paid by a company within 45 days?
MSME Section 43B (h) of the Income Tax Act was added by the Finance Act of 2023 to guarantee MSMEs get payments on schedule and to preserve cash flow. Companies will be required to pay tax on the outstanding value if they do not make payments within 45 days. They won’t be able to avail tax deductions on the accrued amount.
- Does Section 43B H apply to merchants as well?
The Ministry of MSME provided more clarification on this in an office memo dated September 1, 2021. From the foregoing, it is clear that wholesale and retail dealers are exempt from the MSME payment rule hence Section 43B(h) will not apply to them.
- What is the income tax payment regulation 43B?
Section 43B(h) has been introduced by the Finance Act 2023, which is the new MSME payment rule. It states that any amount payable to Micro, Small, and Medium Enterprises for products or services availed would be liable for tax deduction in the same fiscal year, provided the payment is made to the MSME within 45 days.
4. Explain section 43b of income tax act with example?
The deduction for an employer’s Employee Provident Fund (EPF) payment, but only if it is made before the deadline for filing an income tax return, is an ordinary example of how Section 43B is applied.