Tax Publishers

Payments to MSMEs vis-a-vis Section 43B(h) of the Income-tax Act, 1961

CA V.K. Subramani

Presently the hot topic of discussion is about the payment for MSMEs before 31st March, 2024 and the tax consequence of such non-payment. Clause (h) to section 43B was inserted by the Finance Act, 2023 and would be applicable for the assessment year 2024-25 onwards. Non-payment of dues within the specified time and which is outstanding as at 31st March of every previous year would be liable for disallowance which means it would be treated as taxable income of the taxpayer.

The first test in this regard is to check whether the expenditures and payments for purchases, are due to the enterprises engaged in production or manufacture of goods specified in First Schedule to Industries (Development and Regulation) Act, 1951. If not, the provisions of MSMED Act, 2006 and section 43B(h), would not be applicable. [Note: In the case of service, provision of any service after getting registered under MSMED Act, 2006 would enable the service provider to realise his dues well within time.]

If the answer to first test is in the affirmative, the second test is to know whether it is a micro or small enterprise in terms of MSMED Act, 2006. If not, section 43B(h) would not apply. Similarly, if the payee is engaged in trading activity the provisions of section 43B(h) would not apply.

Assuming that the preceding test is also answered in the affirmative viz. engaged in manufacture or production of goods specified in First Schedule of the said Act and it is a micro or small enterprise, the subsequent test would be to know the 'due date' for payment for the purchase or expenditure. It could be 15 days or where there is agreement up to 45 days. The disallowance is in respect of the payables outstanding as on 31st March of the previous year and which are outstanding beyond the time limit referred earlier.

In case of products marketed in buyers' market, while expenditure by way of payments to MSMEs is governed by section 43B(h), the units registered under MSMED Act have to face lesser market response (by way of orders) in view of rigid timelines prescribed for payments.