The Amendment
Through a circular dated January 23, 2024, the Finance Ministry of India has amended Section 43B of the Income Tax Act, 1961 (“IT Act”). Section 43B of IT Act lists certain deductions which can be claimed only upon payment. The amendment has inserted a new sub-clause (h) which states that payments owed to a micro or small enterprise (“MSE”) will be allowed as deduction against total income for a financial year only if such payments are made in the same financial year. The said amendment will come into effect from April 01, 2024.[1]
Tax implication
The disallowance of deduction of such outstanding payments will impact the tax liability of the buyer as it will increase its total taxable income for that year. The amendment aims to reduce the debtor days for MSEs, consequently enhancing their turnover and profitability. This improvement will lead to more effective management of their cash flows and enable investments in expansion. Larger organisation will have to review their payment policies to ensure that payments to MSEs are made within the same financial year to ensure tax efficiency.
Illustration:
Company A, a recognized MSE, supplied goods to Company B on October 01, 2023. Company B made the payment for such goods to Company A on April 01, 2024. Company B cannot claim such payment as deduction against total income in financial year 2023-24 as such payment was made after end of the financial year.
Existing timelines
Payment to a MSE are required to be made as per the agreed timelines set out in the written agreement executed between the buyer and the supplier MSE, subject to maximum period of 45 days. In cases where no written agreement exists, payments to MSEs are required to be made within a period of 15 days from the acceptance or deemed acceptance of goods or services.[2]
Disclosure requirements
Form MSME 1
All buyers that have received goods or services from MSEs and have not made payments to such enterprises within 45 days from the date of acceptance or deemed acceptance of goods or services are required to file Form MSME 1 on a half-yearly basis. This form discloses the total payments due to MSEs by a buyer and the reason for such non-payment.[3]
Other Disclosure
Buyers which are required to audit their books of accounts are legally obligated to disclose all the outstanding payments along with interest due to a MSE in their books of accounts. In the event of non-disclosure of said payments, such buyers shall be liable to pay a fine of atleast INR 10,000.[4]
The amendment marks a significant step towards promoting timely payments to MSEs. Aligning tax deductions with provisions of the Micro, Small and Medium Enterprises Development Act, 2006 underscores the importance of honouring payment obligations to MSEs, thereby fostering a more inclusive and equitable business environment.
For more information about the aforesaid development you may write to us at: solutions@bridgeheadlaw.com.
Karan Narvekar | Partner
Sunny Nirmal | Associate
Views expressed are personal to the authors and do not constitute as legal advice.
[1] https://incometaxindia.gov.in/news/circular-1-2024.pdf
[2] Section 15 of the Micro, Small And Medium Enterprises Development Act, 2006
[3] https://www.mca.gov.in/Ministry/pdf/MSMESpecifiedCompanies_22012019.pdf
[4] Section 22 of the Micro, Small And Medium Enterprises Development Act, 2006
