The Finance Act 2023 inserted Clause h to Section 43B to promote timely payments to micro and small enterprises. It provides that 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 (MSMED) Act 2006 shall be allowed as deduction only on actual payment and proviso to section 43B of the Act shall not apply to such payments.

Applicability on dues from Trader registered under MSMED Act 2006

As per O.M. 5/2(2)/2021-E/P & G/Policy dated 02-07-2021, wholesale and retail trader are entitled for Udyam registration only for the benefit of Priority Sector Lending only. So, purchases from traders would be outside the purview of these amendments. Hence, any sum payable to a creditor, being a trader, shall not attract Sec. 43B(h).

Analysis of Section 43B(h)

When an assessee is buying goods or taking services from enterprises registered under MSMED Act 2006 under Micro or small category and the payments of same are delayed beyond the time limits specified in Section 15 of the MSMED Act, can no longer be claimed as deductions on an accrual basis. Few deductions under Section 43B can be claimed on accrual basis if the payment was made by the due date of furnishing the return of income. However, for this clause purpose, such payments will only be allowed as deductions on actual payment. i.e. In case outstanding payments are not made within the prescribed time limit, which cannot exceed 45 days, then that outstanding payable amount shall be added to the taxable income of the assessee.  The taxpayer has to bear the income-tax liability on the respective outstanding amount. The assessee gets a deduction in the previous year where payments is made.

This amendment will take effect from 1st April, 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years.

So, it applies only to any expenditure incurred on or after 01/04/2023. Hence, invoices issued on or after 01/04/2023 shall be taken into consideration.

Time limits specified in Section 15 of MSMED Act

As per the MSMED Act, if there is written agreement between buyer and seller, then it can not exceed 45 days. However, in absence of agreement, payment should be made within 15 days.

Therefore, in a scenario where the payment terms have been set beyond 45 days (say, 60 days), then it shall be restricted to 45 days.

Can the terms of payment mentioned in the invoice can be considered as written agreement?

As the term “written agreement” is not specified in the act. It would be sufficed even if payment terms are mentioned on the invoice.

Applicability of Section 43B(h) on assessee opting for presumptive taxation

 If the assessee is declaring profits under presumptive scheme u/s 44AD / 44ADA / 44AE of the Act then the above provision is not applicable as it is specifically mentioned in the section that “notwithstanding anything contrary contained in section 28 to section 43C” of the Act.

Examples of Section 43B(h)