Understanding Section 43B(h) of the Income Tax Act for MSEs

Introduction

Section 43B(h) of the Income Tax Act, effective April 1, 2024, is designed to enhance cash flow for micro and small enterprises (MSEs) by instituting stricter payment timelines for buyers. This provision mandates larger companies to complete payments promptly to MSEs; failure to do so will result in the disallowance of related expenses on their tax returns. This article elucidates the critical elements of Section 43B(h), clarifying its implications.

Understanding Section 43B(h)

The introduction of Section 43B(h) serves to support enterprises categorized as micro or small under the MSME Act. It addresses the prevalent issue of delayed payments from larger buyers, which adversely affects the cash flow and growth of MSEs. This provision stipulates that payments must be completed within a specified timeframe; otherwise, the buyer forfeits the right to deduct the expenditure from their taxable income for that financial year.

This section pertains solely to micro and small enterprises as defined by the MSME Development Act, 2006, with medium enterprises excluded.

Enterprise Type	Investment	Turnover
Micro	≤ ₹1 Cr	≤ ₹5 Cr
Small	≤ ₹10 Cr	≤ ₹50 Cr

Payment Timelines Under Section 43B(h)

• With a Written Agreement: Payments must be completed within 45 days from the acceptance date of goods or services.

• Without a Written Agreement: Payments should be finalized within 15 days from either the acceptance date or the invoice date, whichever comes first.

No extensions for compliance have been granted despite industry requests. Buyers must adhere to these timelines for the fiscal year 2024-25 to avoid disallowance.

GST Treatment

• If the Input Tax Credit (ITC) for GST is claimed, only the principal amount is subject to disallowance under Section 43B(h).
• If GST is not claimed as ITC, the entire invoiced amount, including GST, will be disallowed.

Consequences of Delayed Payments

Should a buyer fail to make payment within the mandated timeframe:

• The expense cannot be deducted in the year it was incurred.
• The deduction will be permitted only in the financial year the payment is actually made.
• This leads to an increase in the buyer's taxable income during the delay year, serving as a penalty.
• Delayed payments incur compound interest at three times the RBI's bank rate, which is not tax-deductible under Section 37(1).

Benefits of Section 43B(h) for MSEs

• Promotes timely payments from larger buyers
• Enhances cash flow and working capital for MSEs
• Increases bargaining power in payment discussions
• Strengthens compliance and accountability in commercial transactions

Applicability

• Relevant to micro and small enterprises registered under the MSME Act
• Effective for invoices dated April 1, 2024, and beyond
• Applicable only if the buyer is claiming the purchase as an expense under the Income Tax Act

Conclusion

Section 43B(h) represents a crucial measure to enforce financial discipline in B2B transactions. By tying tax deductions to timely payments, the provision incentivizes larger businesses to adhere to payment schedules, thereby protecting the financial well-being of MSEs. It is essential for businesses to comprehend these timelines and maintain adequate documentation to either leverage benefits or ensure compliance with this provision.