To ensure timely payments to the Micro, Small and Medium Enterprises (MSME) sector, a new regulation will be implemented from April 1. This regulation requires companies to settle their dues with MSMEs within 45 days. Non-compliance will lead to a tax liability on the overdue amount.
What is Section 43B(h)?
The Finance Act 2023 introduced an amendment to the Income Tax Act by adding clause (h) to Section 43B. This clause stipulates that any payments owed to MSMEs, not resolved within 45 days, will not qualify for tax deductions until the payment is made. 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.
Section 43B(h) is applicable to transactions that involve the purchase of goods or services from enterprises registered under the MSMED Act, 2006.
Section 43B(h) explained
Section 43B(h) of the Income Tax Act, introduced in 2023, aims to ensure timely payments to Micro, Small and Medium Enterprises (MSMEs). Here's a breakdown of what it means for you:
What it does:
This section disallows businesses from claiming deductions for expenses incurred towards goods or services purchased from MSMEs if the payment is delayed beyond a specific timeframe. In simpler terms, if you don't pay an MSME on time, you can't deduct that expense from your taxable income, potentially increasing your tax liability.
In India, businesses typically record expenses as they occur (accrual basis), regardless of whether the payment has been made. However, Section 15 of the MSMED Act, 2006, alongside the newly introduced Section 43B(h) of the Income Tax Act, mandates that businesses must settle their dues with MSME Registered Enterprises within 15 days, or up to 45 days under a mutual agreement.
Starting from April 1, companies, sole proprietorships, partnerships, or LLPs, are required to pay their suppliers registered as MSMEs within 15 days, or up to 45 days under an agreement.
Picture this: "Crafty Creations," a small enterprise specialising in handmade ceramics, supplies its products to "Elegant Homes," a large retail chain. Under the standard industry practice, Elegant Homes would typically take about 90 to 120 days to settle its invoices with Crafty Creations.
From April 1, Elegant Homes is required to settle its dues with Crafty Creations within 45 days from the invoice date.
For example, if Crafty Creations issues an invoice to Elegant Homes on April 1, the payment for this invoice should be made by May 15. If Elegant Homes delays payment beyond this period, it faces a tax liability on the overdue amount, essentially costing the company more.
Impact on MSMEs
Representatives from the traders' body CAIT have appealed to Finance Minister Nirmala Sitharaman for a deferral of the clause in the Income Tax Act related to MSME payments until April 2025, citing a "lack of clarity" on the law's applicability to traders among other provisions.
According to the Clothing Manufacturers Association of India (CMAI), MSME apparel manufacturers are anticipated to incur losses of Rs 5,000-7,000 crore in the January-March quarter due to the amendment.
The CMAI claims the new rule has led retailers to cancel orders with MSMEs in favour of non-MSME players. Read Business Standard's report here
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,” stated the CMAI in a note.
“Additionally, a significant number of retailers are considering returning unsold merchandise to the manufacturers, thus relieving themselves of the payment obligation,” it added.
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