Call Section 43B(h) and what you need to know to avoid disallowance of expenses
Introduction:
India is one of the fastest growing economy in the world as of now. With an increase in manufacturing and service providing businesses in India, MSME businesses (Micro, Small and Medium Enterprises) plays a very vital role in shaping the future of these industries. MSME businesses needs various kinds of support from various stakeholders to sustain and thrive in this competitive environment. One of the most important issue these MSME businesses face is related to the working capital requirement. Working capital is the backbone of any business and restraint in working capital hampers the growth of the business.
India is one of the fastest growing economy in the world as of now. With an increase in manufacturing and service providing businesses in India, MSME businesses (Micro, Small and Medium Enterprises) plays a very vital role in shaping the future of these industries. MSME businesses needs various kinds of support from various stakeholders to sustain and thrive in this competitive environment. One of the most important issue these MSME businesses face is related to the working capital requirement. Working capital is the backbone of any business and restraint in working capital hampers the growth of the business.
To tackle this very specific issue, clause (h) to Section 43B of the Income Tax Act, 1961, was inserted by Finance Act, 2023. This clause talks about payment of sums payable to MSMEs within a specified time. This is done to ensure prompt and timely payments by businesses to other MSME entities.
This new clause (h) is applicable to Micro and Small enterprises and not applicable to medium enterprises. This clause will be effective from AY 2024-25.
Section 4B(h):
Section 43B(h) simply provides that, the deduction for the expenses will be allowed to the assessee company in the same year in which the payment is supposed to be made, provided that the payment is made within due date as specified by the section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006). Irrespective of the accounting method followed, this clause will be applied to all the entities making payments to MSEs.
Turnover limits to determine Micro, Small and Medium status :
| Particulars | Micro | Small | Medium |
| Turnover | <= 5 cr. | <=50 cr. | <=250 cr. |
| Investment in Plant & Machinary | <= 1 cr. | <= 10 cr. | <= 50 cr. |
Section 15 of the MSMED Act determines the time limits for payments to be made to the MSMEs.
Timeframes to make payments to MSMEs when:
- Payment terms are specified under an agreement between buyer and the MSEs
- Payment should be made within earlier of
- Due date as mentioned in agfreement
- 45 days from date of acceptance i.e. date on which actual delivery of goods or services is made
- Payment terms are not specified in the agreement
- Payment should be made within 15 days of date of acceptance
Let us understand this amended clause (h) from examples given below:
For understanding purpose due date is taken as 45 days
| Sr. No. | Invoice date | Payment Due Date | Actual Payment Date | FY for which deduction is allowed |
| 1 | 01/02/2024 | 16/03/2024 | 31/03/2024 | 2023-24 |
| 2 | 01/02/2024 | 16/03/2024 | 05/04/2024 | 2024-25 |
| 3 | 17/02/2024 | 02/04/2024 | 01/04/2024 | 2023-24 |
| 4 | 01/03/2024 | 14/04/2024 | 26/04/2024 | 2024-25 |
| 5 | 10/12/2023 | 24/01/2024 | 26/03/2024 | 2023-24 |
| 6 | 10/12/2023 | 24/01/2024 | 01/04/2024 | 2024-25 |
| 7 | 15/11/2023 | 29/12/2023 | 02/04/2024 | 2024-25 |
| 8 | 15/11/2023 | 29/12/2023 | 30/03/2024 | 2023-24 |
Other important points:
- Clause (h) is not applicable to Medium enterprises
- Clause (h) is not applicable to Traders
- Clause (h) is not applicable to those enterprises which are not registered under MSME Act
- Clause (h) is applicable to only Manufacturing and Service sector enterprises
- Expenses will not be allowed as deduction if payments are not made within specified due date
- Auditor has to do reporting in clause 26 of Form 3CD regarding Section 43B(h)
Conclusion:
The amendment to clause (h) of Section 43B is an important step in bringing the desired change in payment structure of businesses to ensure timely and prompt payments to MSEs. This will ensure better stability to MSEs in terms of having ample amount of working capital. Businesses can use this as a tool for better tax planning and better compliance. MSEs will experience hassle free payment cycles, proper fund managements and reduction in disputes among businesses.
About Author:
CA Chinmay Shirish Agate Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.