Payments To Micro And Small Enterprises (MSEs): Implications Under Section 43B(h) Of Income-tax Act, 1961

• Published date: 02 April 2024
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Tax, Financial Services, M&A/Private Equity, Corporate and Company Law, Income Tax, Sales Taxes: VAT, GST
• Law Firm: S&R Associates
• Author: Mr Sumit Bansal, Shivani Chhabra and Ankur Kishanpuria

In order to encourage prompt payments by business enterprises to micro and small enterprises ("MSEs"), clause (h) was inserted in Section 43B of Income Tax Act, 1961 ("the IT Act") by the Finance Act 2023 with effect from financial year ("FY") 2023-24. Section 43B(h) provides that if payment to MSEs is not made within the prescribed timeline (as discussed below), then tax deduction / allowance of such sum payable to MSE will only be allowed on payment basis from the profits of relevant FY.

In this note, we examine the stipulations outlined in Section 43B(h) of the IT Act and its implications on the taxpayers.

Relevant provisions

Section 43B(h) of the IT Act

Section 43B(h) provides that any sum payable by an assessee to a 'micro enterprise' or a 'small enterprise' beyond the time ("Specified time") specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act") will be allowed only in the year in which such sum is actually paid.¹

Further, it is also worth noting that clause (h) of Section 43B of the IT Act has been specifically excluded from the first proviso to Section 43B of the IT Act, which allows deduction of expenses if payment is made after the relevant FY but within the due date of filing return of income. Accordingly, if an assessee settles its dues to an MSE beyond the Specified time for a relevant FY, such payment would be disallowed even if made before the return filing due date.

Classification of micro enterprise and small enterprise

Notification No. 2119(E) dated June 26, 2020 ("Notification No. 2119(E)") issued by the Ministry of Micro, Small and Medium Enterprises ("MSME") read with Section 7 of MSMED Act and Explanations 4(e) and 4(g) to Section 43B of the IT Act provide the following criteria for classification of 'micro enterprise' and 'small enterprise':

Micro enterprise: An enterprise having investment in plant and machinery or equipment not exceeding INR 10 million and turnover not exceeding INR 50 million.

Small enterprise: An enterprise having investment in plant and machinery or equipment not exceeding INR 100 million and turnover not exceeding INR 500 million.

Specified time under Section 15 of the MSMED Act

The timelines for payment to MSEs as provided in Section 15 of the MSMED Act are as under:

Particulars	Timelines
If payment timelines have been specified under an agreement between the buyer and MSE	Payment should be made within earlier of the following dates: Due date specified in the agreement, or 45 days from the 'day of acceptance'. 'Day of acceptance' is the day of actual...