FAQs on section 43B(h)– Critical analysis covering applicability, threshold with examples
Finance Act 2023 introduced section 43B(h) for protecting Micro and Small enterprises on supply of manufactured goods and services by making the disallowance provision dir payment more stringent under the Income Tax Act, 1961. The amendment aims at addressing the issue of working capital blockage of MSME industry with customers and for promoting prompt payments to micro and small business owners. This document contains the critical analysis of Section 43B(h) along with FAQs covering different scenarios on applicability, threshold and timeline with examples.
Introduction
Section 43B(h) of the Income Tax Act, 1961 (‘IT Act’) was inserted vide Finance Act, 2023, 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 Act, 2006, shall be allowed only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum arose to the Assessee according to the method of accounting regularly employed by him. The section was made effective from Assessment Year 2024-15, i.e. in relation to transactions entered into from April 01, 2023.
Change in payment clause
Implications on allowance of expenditure As per Section 43B, in respect of certain expenditure / payments, deduction is allowed only if the amount has been actually paid during the previous year. The Finance Bill 2023 has inserted as new clause (h) in Section 43B of Income Tax Act to assure timely payments to the MSME Vendors. As per Section 43B(h), any sum payable to MICRO or SMALL enterprises, beyond the time limit specified in section 15 of MSMED Act 2006 shall be allowed as deduction only on actual Payment. It means, if an entity fails to pay micro and small enterprise with in the stipulated time, then such expenses will be allowed as deduction in the year in which actual payment is made. As per Section 15 of MSMED Act 2006, where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payments thereof on or before the written agreed date. In no cases these agreed day shall be more than 45 days from the date of acceptance or deemed acceptance. If there are no written agreement as to this date, the payment shall be made within 15 days.
Some examples clarifying position of law
Example 1 Invoices raised by a Micro enterprise on February 15, 2024. Invoice booked on February 28, 2024. Payment terms 30 days. Payment made by the entity on March 12, 2024. Expenses will be allowed in FY 23-24 as payment is made within due date.
Example 2 Invoices raised by a Micro enterprise on February 15, 2024. Invoice booked on February 28, Payment terms 30 days. Payment made by the entity on March 31, 2024. Expenses will be allowed in FY 23-24. Though the payment is made beyond due date, still it will be allowed as it is paid with in the same FY and will be allowed on payment basis. However, interest as per MSMED Act will be applicable for delayed payment.
Example 3 Invoices raised by a Micro enterprise on March 15, 2024. Invoice booked on March 30, 2024. Payment terms 30 days. Payment made by the entity on April 12, 2024. Expenses will be allowed in FY 23-24 as payment is made within due date.
Example 4 Invoices raised by a Micro enterprise on March 15, 2024. Invoice booked on March 30, 2024. Payment terms 30 days. Payment made by the entity on April 15, 2024. Deduction of Expenses will be allowed in FY 24-25. as payment is not made within the stipulated period. For the purpose of taxation, Expense booked in 2023-24 will have to be deducted and transferred to FY 2024-25.
Example 5 Invoices raised by a Micro enterprise on March 15, 2024. Invoice booked on April 10, 2024. Payment terms 30 days. Payment made by the entity on April 12/ 25, 2024. Expenses will be allowed in FY 24-25 in both the cases as expenses itself is booked in FY 24-25.
Frequently asked questions
1) From which date the provisions of Section 43B(h) of Income Tax Act 1961 will be applicable?
Answer: The provision of Section will be applicable from April 01, 2024. This amendment is made applicable from assessment year 2024-25 i.e. FY 2023-24.
2) What this section 43B(h) states?
Answer: Section 43B(h) stipulates that any sum owed to Micro and Small enterprises for supplying of goods or rendering of services will be allowed as deduction of expenses in the year in which it has been actually paid within the deadline stipulated as per Section 15 of MSMED Act 2006.
3) What is the timeline as per MSMED Act 2006?
Answer: As per Section 15 of MSMED Act 2006, where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payments thereof on or before the written agreed date. In no cases these agreed day shall be more than 45 days from the date of acceptance or deemed acceptance. If there are no written agreement as to this date, the payment shall be made within 15 days from the date of acceptance of goods and/or rendering of services.
4) Is there any exception to this time frame?
Answer: As per section 2(b) of MSMED Act, “Appointed day” means the day following immediately after expiry of 15 days from day of acceptance of goods or services by buyer. The day of acceptance means the day of actual delivery of goods or services.
Where objection is made within 15 days of delivery of goods by the buyer in writing, acceptance day means the day on which such objection is removed. This time frame is applicable for any undisputed / unobjectionable supply of goods and /or services.
5) Are all MSME enterprises are covered in Section 43B(h)?
Answer: a) Only Mirco and Small enterprises are covered in Section 43B(h). This payment clause will not be applicable for ‘Medium’ Enterprises.
b) Wholesale and Retail Trader are entitled to Udyam Registration only for the benefit of priority sector lending. So section 43B(h) will not be applicable for the dues outstanding to Traders.
6) What will happen if payment to MSME Vendors are not made within the stipulated time?
Answer: Section 43B(h) only states that expenses incurred in the form of buying of goods or obtaining of services will be allowed as deduction of expenses in the FY in which it has actually been paid.
This means, even if payment is delayed but paid within the same FY, it will be allowed as deduction. Interest as per MSMED Act 2006 will be applicable for delayed payments. Interest so paid will not be allowed under Income Tax Act.
Section 23 of MSMED Act states that interest payable or paid by the buyer under the MSMED Act shall not be allowed as a deduction under the Income Tax Act, 1961.
Example: Invoice date / Acceptance date 01.01.2024. Agreed Payment terms 30 days. Actual Payment made – March 30, 2024. The expense will be allowed as deduction in FY 23-24 as it is paid in the same FY. For delayed payment, interest will be applicable as per MSMES Act 2026.
7) The company is violating the payment terms and it is disallowed in the year in which the expense is booked. Then how it will be dealt with in the books of accounts?
Answer: This expense will be allowed on payment basis. It means it will be allowed in the year in which the actual payment to vendor is made. Interest as per MSMED Act will be applicable.
8) This provisions of Section 43B(h) applicable from 01/04/2024. Whether this provision will be applicable for the invoice raised and booked in FY 2023-24.
Answer: Yes, It will be applicable for the invoices raised and booked in FY 2023-24. The provisions of section 43B(h) is applicable from the Assessment year 2024-25. So invoice raised in the previous year 2023-24 will come under the ambit of this section.
9) Service received from a MSME vendor for Capitalization scheme. Will this section 43B(h) will be applicable for this activity?
Answer: Section 43B states about the allowance of certain expenses as deduction on payment basis. When service is obtained for any capitalization work, the amount paid to the vendor will be capitalized and will be considered as ‘Capital Expenditure’. So, question of allowance as deduction as per Section 43B(h) will not arises.
But it the payment is delayed to MSME vendors even for such capital expenditure, Interest as per MSMED Act will be applicable.
Section 43B(h) is applicable on a sum payable in respect of which deduction is otherwise applicable. In case of capital goods, 100% deduction is not an allowable in the same year. Hence, disallowance will not be attracted u/s 43B(h).
10) Material is purchased from MSME Vendors and currently it is not determined the purpose for which it will be utilized. Will Section 43B(h) is applicable for such Inventory purchase?
Answer: A SOP should be designed wherein within 45 days, the nature of use of the material purchased should be decided and bifurcated. If FIFO method of application of material is being currently deployed by the Company for utilising/ expensing off the materials purchased first, so there shall be an ease in deciding the nature of use before 45 days.
11) In many cases invoices date is earlier than the date on which it actually comes to accounts for processing. For Example, invoice raised by the vendor on 10.02.2024 and submitted on 12.02.2024. After certification of Invoices from user department it comes to Finance for processing on 27.02.2024. Then which date will be considered as effective date for the purpose of compliance with section 15 of MSMED Act 2006?
Answer: As per Section 15 of the MSMED Act 2006, payment to be made to the buyer within the written agreed date. Where there is no such agreement in writing, payment to be made before ‘appointed’ date.
As per Section 2(b) of the MSMED Act 2006, ‘appointed day’ means the day following immediately after the expiry of the period of 15 days from the date of acceptance or deemed acceptance of any goods or services by a buyer or supplier. The day of acceptance means
a. The day of the actual delivery of goods or rendering of services; or
b. Where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of delivery of goods and services, the day on which such objection is removed.
As per the law, 10.02.2024 is the acceptance date unless a written objection is raised ill before 25.02.2024 in this case.
12) Is there any exception to this time frame?
Answer: This time frame is applicable for any undisputed / unobjectionable supply of goods and /or services. If there is in no dispute between the buyer and supplier, the payment has to be made with in time frame as mentioned above. But if there is any objection raised by the buyer, then this time frame will start from the date when such objection is removed. But such objection should be raised in writing on or before 15 days from the date of delivery of goods or rendering of services by vendor.
13) What is the responsibility of Payer Company to ascertain the status of a Vendor?
Answer: Yes, this can be made part of the on boarding process by adding it in raising of “Purchase Order process”. Tabs like Aadhaar Udyam Registration number, whether trader etc. can be added in the list of requirements for on-boarding.
14) If the status of a Vendor Changes from Micro / Small to Medium or comes out of the preview of MSME, how long such payment terms as per Section 15 of MSMED Act 2006 will remain valid?
Answer: In view of notification dated 18.10.2022, the vendors will continue to receive the benefits of MSMED Act for three years.
As per para8(5) of the Notification No. F. No. P-05/1/2022-GEN dated October 18, 2022, enterprise shall continue to avail non-tax benefits for a period of 3 years.
15) Is there any exception to this time frame?
Answer: This time frame is applicable for any undisputed / unobjectionable supply of goods and /or services. If there is in no dispute between the buyer and supplier, the payment has to be made with in time frame as mentioned above. But if there is any objection raised by the buyer, then this time frame will start from the date when such objection is removed. But such objection should be raised in writing on or before 15 days from the date of delivery of goods or rendering of services by vendor.
16) What is the responsibility of Payer Company to ascertain the status of a Vendor?
Answer: Yes, this can be made part of the on boarding process by adding it in raising of “Purchase Order process”. Tabs like Aadhaar Udyam Registration number, whether trader etc. can be added in the list of requirements for on-boarding.
17) If the status of a Vendor Changes from Micro / Small to Medium or comes out of the preview of MSME, how long such payment terms as per Section 15 of MSMED Act 2006 will remain valid?
Answer: In view of notification dated 18.10.2022, the vendors will continue to receive the benefits of MSMED Act for three years.
As per para8(5) of the Notification No. F. No. P-05/1/2022-GEN dated October 18, 2022, enterprise shall continue to avail non-tax benefits for a period of 3 years.
18) Existing vendor obtained MSME registration after 2/3 months of his acceptance of order and intimate us after 2/3 months of such registration date? Can Payer Company be held liable for delay in payments as per MSMED Act 2006?
Answer: Payer Company needs to get the status of MSME confirmed with the vendors. Further, in case of non-receipt of any reply, follow up action should also be taken and records are to be preserved for such follow up. Payer Company should also carry out this activity at least once in a year wherein it confirms the MSME status and change thereon from the vendor. In case of following up this procedure, if vendors fail to intimate its registration under MSME, Payer Company would not be liable for any delay occurred prior to such intimation.
However, as reasonable caution, Payer Company must ask vendor to mention MSE Status on the letterhead in accordance with the GOI Notification No. 2(28)/2007-MSME(Pol) dated August 26, 2008.
19) Traders and wholesalers can take registration only for the benefits of priority sector lending.
Till now these are not being separately shown and classified as MSME ( Micro and small) in Financials. Should we segregate such ‘traders’ from the MSME classifications in Financials?
Answer: Yes, we need to segregate ‘trader MSME’ outstanding balance and deduct it from the balance of MSME in Balance Sheet. This is a suitable approach from Income tax perspective. Even though from MCA perspective, the reporting could be different.
20) Our Auditor, being MSME, raises invoice for Tax Audit in the month of March. We make them payment in the month of October after the Tax Audit. How to deal with this?
Same is the case with some other vendor where Bonus amount is claimed in the month of March through Tax Invoices. But payment of such bonus is made in the month of Oct.
What should be done considering the provisions of
a)MSMED Act 2006 and
b)Section 43B(h) of Income Tax Act 1961
Answer: There is no change required as MSMED Act requires payment after the delivery of goods/services. So in this case, the payment needs to be made only after the delivery of services or actual payment of bonus by the vendor to its employee.
21) From August 2023, Vendors having Turnover over INR 5 Crs needs to raise E-invoices. But in e-invoices format, there is no place to put the MSME registration number. Then how to check the status of the vendor.
Answer: It is advisable is to take information at the time of raising Purchase Order. Subsequently, compliance team may send 6 monthly PO review links to all vendors for capturing changes to vendor status.
22) In many cases payment terms specifies as “Immediate of on Date of Delivery”. How to deal in such cases as it is practically very difficult to make such payment in defined time.
Answer: Payment needs to be made within 15 days from the date of delivery.
23) Bills booked in the m/o March i.e. at the year-end are paid subject to Compliance and User department approval and other requirements, which may delay the payment within the stipulated time of 30 days as per Contract. How to deal in such situations.
Answer: For the month of March, if the payment is made within 45 days, it shall be allowed as a deduction u/s 43B(h), even if it was made after the end of Financial Year but was made within due date under the MSMED Act. Valid objections should be raised within 15 days of the closure of month and discipline needs to be exercised at this end.
24) Whether due date will be counted from date of clearing of default. For Example, if the Invoice date was 15th March 2024 and payment terms says i) either immediate or ii) Within 30 days. And if the objection was raised on 25th March 2024 in both the cases. What will be the due date if the defect was rectified on 31st March 2024.
Answer: 15 days would be reckoned from the date of clearing the defects.
25) In case a creditor upgrades to MEDIUM after 18.10.2022, such enterprises will continue to benefit all non-tax benefits of the old category (Micro or small) for a period of three years from the date of such upward change as per Notification dated October 18, 2022. Whether as per this notification, interest & disallowance also applicable for such medium category which has been upgraded post 18.10.2022.
Answer: Yes, this notification mandates that benefit of MSMED Act, 2006 would be continued for three years’ when he cased to be a micro/small vendor. This notification does not waive off the interest and thus interest & disallowance shall also applicable for such medium category which has been upgraded post 18.10.2022. Only non-tax benefits shall be continued for a period of 3 years from the date of reclassification.
26) Invoices raised by a Micro enterprise on March 15, 2024 (material received on same date). Invoice booked on March 30, 2024.Payment terms 30 days. Objection raised on March 30, 2024. Objection cleared on April 28, 2024. Payment made by the entity on April 30, 2024. In which year such expense will be allowed?
Answer: Objection has been raised within 15 days of the receipt of material. Further, payment has also been made within 15 days of clearing the objection. Expenses has already been booked in financial year 2023-24. Expenses should be allowed in Financial Year 2023-24 as the requirement of Section 43B(h) has been complied and by virtue of this there is no disallowance in Financial year 2023-24.
27) Invoices raised by a Micro enterprise on March 15, 2024 (material received on same date). Invoice booked on March 30, 2024.Payment terms 30 days. Objection raised on March 30, 2024. Objection cleared on November 28, 2024. Payment made by the entity on November 30, 2024. In which year such expense will be allowed?
Answer: Objection has been raised within 15 days of the receipt of material. Further, payment has also been made within the agreed time of clearing the objection. Expenses has already been booked in financial year 2023-24. Expenses should be allowed in Financial Year 2023-24 as the requirement of Section 43B(h) has been complied and by virtue of this, there is no disallowance in Financial year 2023-24.
However, if at the time of return filing or tax audit report, this information was not available, it should be investigated at that time itself. However, if at the time of return filing or tax audit report, this information was not available, it should be investigated at that time itself.
28) Invoices raised by a Micro enterprise on March 15, 2024 (material received on same date). Invoice booked on March 30, 2024.Payment terms 30 days. Objection raised on March 30, 2024. Objection cleared on November 28, 2024. Payment made by the entity on December 30, 2024. In which year such expense will be allowed?
Answer: Objection has been raised within 15 days of the receipt of material. Further, payment has not been made with the agreed time of 30 days of clearing the objection. Expenses has already been booked in financial year 2023-24. Expenses would be dis-allowed in Financial Year 2023-24 as the requirement of Section 43B(h) has not been complied and by virtue of this, this expenses would be allowed in financial year 2024-25. The actual date of payment is beyond the tax audit and return filing date, then it is practically impossible to decide tax deductibility.
29) In case any invoice has been unpaid as on March 31, 2024 and objection has been raised with 15 days of material delivery (i.e. within time allowed as per section 15 read with section 2(b) of MSMED Act). Does this expenses will be disallowed in FY 2023-24.
Answer: No, Objection has been raised within 15 days of the receipt of material. Its disallowance would be decided on the basis of its timely payment after the clearing of objections. If the payment is not cleared timely after clearing of objections, such expenses would be disallowed in financial year 2023-24. To be tested at the time of tax audit and return filing in 2024.
30) In case payment is delayed to an MSME vendor & we have taken undertaking from such MSME vendor that the late bill submission/ delay in payments were on their part & they will not claim interest under MSME Act on such delay payments. In such case, whether, we need to provide interest in books of accounts.
Answer: Ideally this arrangement would not waive off the levying of interest.
31) In case, a letter has been taken from a vendor at the year-end that he is not entitled under MSME Act for any supply to Payer Company in spite the fact he is a Micro/ Small enterprise as per MSMED Act. Does this arrangement will escape Payer Company from disallowance for unpaid bills of such vendor?
Answer: No, merely talking the letter from the vendor that he is not entitled under MSMED Act, 2006 would not escape Payer Company from disallowance wherein Payer Company is aware that the vendor is a MSME vendor.
32) What if a supplier fails to intimate MSME registration to the Payer Company?
Answer: It is the responsibility of Payer Company to ask the vendor to submit its MSME registration particulars to the company. Further, on non-receipt of details, the company should make an endeavours to get the details from the party and a reminder letter needs to be sent. Even after taking these steps, no details are received, Payer Company has no actions to be taken and such vendor may be treated like a normal vendor.
33) What will be the treatment of GST component on the unpaid invoice ?
Answer: Since GST input is an asset and is claimed as ITC in the books, disallowance of expense u/s 43B(h) shall not have any impact on input GST.