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Deduction for dues to MSME on a payment basis only

Updated: Jan 19

Payments to MSME

The Indian government has always been keen on promoting the growth and development of micro, small, and medium enterprises (MSMEs) in the country. To promote timely payments to micro and small enterprises, the Budget 2023-24 has brought a change, according to which, the deduction for expenditure incurred on payments made to micro and small enterprises will be allowed only when payment is actually made. In this regard, two amendments have been made in section 43B. A new clause (h) has been introduced and the proviso to section 43B has also been amended.


The relevant extract of section 43B(h) is as under

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(h) 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 Act, 2006

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.


Further, the proviso to section 43B has also been amended. In the proviso, after the words “nothing contained in this section”, the brackets, words, and letter “[except the provisions of clause (h)]” shall be inserted.

Section 43B of the Act provides for certain deductions to be allowed only on actual payment. This includes deductions such as the sum payable by way of tax, duty, cess, the sum payable as interest on loans & borrowings from scheduled banks, etc. Now with the introduction of new clause (h), the deduction of expenditure incurred on payment to be made to micro and small enterprises will be allowed on a payment basis. However, this clause will only be applicable, where the payment is made beyond the time limit specified in the Micro, Small, and Medium Enterprises Development Act, 2006.


Section 15 of the MSMED Act, 2006 talks about the time limit to make payments to Micro and small enterprises. According to this section, the buyer is required to make payment on or before the due date agreed upon between him and the supplier, or in case of no agreement, before the appointed day, which is explained below.


With agreement

If there is an agreement between the supplier and the recipient, the time limit shall be the period specified in the agreement or 45 days, whichever is less. That is, in any case, the time limit cannot be beyond 45 days. Even if the time limit specified in the agreement is more than 45 days, the buyer will have to make payment within 45 days, or else the deduction under The Income-tax Act will be allowed on a payment basis and further the buyer will have to pay interest as specified in section 16 of the MSMED Act, 2006.


Without agreement

If there is no agreement between the buyer and the seller the payment has to be made before the appointed day. Section 2 of the MSMSED Act, 2006 defines appointed day-

appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier."

Further explanation to this definition also clarifies, the meaning of the day of acceptance and the day of deemed acceptance. Where the buyer does not make any objections regarding the goods/services within 15 days from the day of the delivery of goods or the rendering of services, the day of acceptance or the day of deemed acceptance shall be the date of actual delivery of goods or the rendering of services. However, where any objection has been made by the buyer in writing within 15 days, the day of acceptance will be the day on which such objection is removed by the supplier.


This is to be noted that this amendment applies only to micro and small enterprises. Medium enterprises are kept out of the ambit of this section.


Who is Covered?

The amendment extends its coverage to all assesses involved in any business or profession, regardless of their turnover or income in the preceding year.


Definition of Micro and Small Enterprises:

  • A micro enterprise is an enterprise where the investment in plant and machinery or equipment does not exceed ₹1 crore and turnover does not exceed ₹5 crore

  • A small enterprise is an enterprise where the investment in plant and machinery or equipment does not exceed ₹10 crore and turnover does not exceed ₹50 crore;


Proviso to section 43B

The proviso says that provisions of section 43B shall not apply if the payment is made on or before the due date of filing the return u/s 139 of the previous year in which such expenditure was incurred. However, this proviso will not be applicable in this case. In case of a delay in payment to micro and small enterprises, beyond the specified time, the deduction for such expenditure will be allowed in the year of actual payment.


This can be understood with the help of a few examples:

Date of Invoice

Date of Payment

Agreement

Time Limit (Days)

Accrual/Cash

Date of Deduction

01/05/2023

10/05/2023

No

15

Accrual

01/05/2023

01/05/2023

20/05/2023

No

15

Cash

20/05/2023

10/03/2024

20/03/2024

No

15

Accrual

10/03/2024

10/03/2024

31/03/2024

No

15

Cash

31/03/2024 i.e. FY 23-24

10/03/2024

01/04/2024

No

15

Cash

01/04/2024 i.e. FY 24-25

20/03/2024

01/04/2024

No

15

Accrual

20/03/2024 i.e. FY 23-24

20/03/2024

05/04/2024

No

15

Cash

05/04/2024 i.e. FY 24-25

01/05/2023

10/05/2023

Yes

45

Accrual

01/05/2023

01/05/2023

10/07/2023

Yes

45

Cash

10/07/2023

10/02/2024

02/03/2024

Yes

45

Accrual

10/02/2024

10/02/2024

31/03/2024

Yes

45

Cash

31/03/2024 i.e. FY 23-24

10/02/2024

02/04/2024

Yes

45

Cash

02/04/2024 i.e. FY 24-25

10/03/2024

02/04/2024

Yes

45

Accrual

10/03/2024 i.e. FY 23-24

10/03/2024

24/04/2024

Yes

45

Cash

25/04/2024 i.e. FY 24-25

Consequences under MSMED Act, 2016

Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 provides that where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified as by the Reserve Bank.

Further, Section 23 of the MSMED Act has specifically prohibited the assessee from claiming the deduction from the income on account of interest paid to MSME.


Applicability

This amendment will take effect from 1st April 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years. However, it will not affect unpaid amounts brought forward from earlier years. Where the deduction for any such sum payable to Micro and small enterprises has been claimed in the year in which the liability to pay such sum was incurred, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.


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