Section 43B(h) of IT Act: Impact on MSME Payments and Corporate Tax Liabilities

What’s in today’s article?

• Why in News?
• What is Section 43B(h) of the IT Act?
• Benefits of Clause (h) of Section 43B
• Concerns Regarding the Implementation of Section 43B(h) of the IT Act

Why in News?

Industry body SME Chamber of India has urged Finance Minister Nirmala Sitharaman to continue the 45-day MSME payment rule for corporates and other buyers.

According to Section 43B(h) of the Income Tax Act, if a larger company does not pay an MSME on time (within 45 days in case of written agreements) it cannot deduct that expense from its taxable income, leading to potentially higher taxes.

What is Section 43B(h) of the IT Act?

• The Finance Act 2023 introduced an amendment to the IT Act by adding clause (h) to Section 43B.
• This clause stipulates that payments due to UDYAN-registered MSMEs would be allowed as deduction only if the actual payment was made.
  • In simpler terms, if one doesn't pay an MSME on time, they can't deduct that expense from their taxable income, potentially increasing their tax liability.
• Section 43B(h) is applicable to transactions that involve the purchase of goods or services from enterprises registered under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
• Starting from April 1, companies, sole proprietorships, partnerships or LLPs, are required to pay their suppliers registered as MSMEs
  • Within 45 days, if a MSME unit had a written agreement with a medium or large-scale industry for supply of components, spares, or any other product or service.
  • If there was no agreement, the payment should be made within 15 days.
• The aim is to motivate larger entities to prioritise their settlements with MSME counterparts, thereby promoting a more robust economic environment for these smaller businesses.

Benefits of Clause (h) of Section 43B:

• For MSMEs:
  • Smooth Payment Cycle
    • Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is important for their (MSMEs’) sustainability and growth.
  • Better Bargaining Power
    • The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities.
  • Reduced Disputes
    • Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues are minimised, saving time and resources for both MSMEs and larger businesses alike.
• For Larger Enterprises:
  • Tax Planning
    • While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities.
  • Compliance and Transparency
    • IT Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
  • Strong MSME Ecosystem
    • Ensuring prompt payments to MSMEs incentivises a robust MSME ecosystem, benefiting larger entities through a vibrant supply chain and ease of access to various resources.

Concerns Regarding the Implementation of Section 43B(h) of the IT Act:

• Many market players have appealed for a deferral of the clause until April 2025, citing a lack of clarity on the law's applicability.
• The retail industry typically operates on a credit day cycle of 90-120 days for payments, which can sometimes extend to 180 days.
  • It is common for even well-regarded retailers to adhere to this timeframe for settling payments.
  • Therefore, the expectation for retailers to instantly adjust their business models to comply with a 45-day payment cycle is highly unrealistic.
• The new rule has led retailers to cancel orders with MSMEs in favour of non-MSME players.
  • As a result, MSME apparel manufacturers are anticipated to incur losses of Rs 5,000-7,000 crore in the January-March quarter due to the amendment.
  • This means the intervention is also hurting a section of the industry.

Additionally, a significant number of retailers are considering returning unsold merchandise to the manufacturers, thus relieving themselves of the payment obligation.

Q.1. What is Micro, Small and Medium Enterprises Development (MSMED) Act, 2006?

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is an Indian law aimed at promoting, developing, and enhancing the competitiveness of micro, small, and medium enterprises through policy support, infrastructure development, and financial assistance.

Q.2. What is SME Chamber of India?

The SME Chamber of India is an organization that supports small and medium enterprises (SMEs) by providing resources, networking opportunities, advocacy, and assistance in areas such as finance, technology, and international trade to promote their growth and competitiveness.

Source: Industry body urges FM Sitharaman to continue 45-day MSME payment rule | Financial Express | Business Standard