New Section 43B (h) of the Income Tax Act, – Boon or Bane ?

KORAH AND KORAH, CHARTERED ACCOUNTANTS

The Central Government through an amendment in the Income Tax Act, has sought to address the issue of delayed payments that the small-scale sector faces on its sale invoices. Will it adversely affect you?

 

A. Introduction

The Central Government through an amendment in the Income Tax Act, has sought to address the issue of delayed payments that the small-scale sector faces on its sale invoices. While the stated objective of this amendment is laudable, it could have an unintended detrimental effect on various industries & sectors, which would in turn negatively impact the small-scale sector in a major way due to a drop in sales orders for their products & services. To understand the issue, let’s first understand how Section 43B of the Income Tax Act,1961, works.

B. Understanding Section 43B

Section 43B lists certain expenditure like duties, cess, fees, employer’s contribution to PF, gratuity, interest on Bank loans and so on, which as per this Section, can be claimed as business expenditure for arriving at your income tax dues, only after the payment or remittance of such expenditure is done.

In case the business entity has not remitted or paid the amount as on the last day of the Financial Year viz 31 March, this Section gives time till the due date of filing the Tax Return applicable to the Business entity. For easy understanding, let’s take an example:

 

ABC Pvt Ltd has shown Rs 25 lakhs as Gratuity expenses during FY 23-24. However as on 31 March 2024, it has not made this payment. If it however, makes payment on or before 31 Oct 2024, which is the due date for filing the Income Tax Return of companies, then ABC Pvt Ltd would be able to claim the Gratuity as a legitimate business expense for arriving at the taxable profit for FY 2023-24.

C. Section 43B(h) relating to payments to Micro & Small Enterprises

An amendment which is creating heartburn among business owners has been done by inserting clause (h) in Section 43B.

Clause (h) states “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 (MSMED) Act, 2006 (27 of 2006),”

On a quick reading of this clause, it would appear that like the other expenditure items listed in the other clauses of Section 43B, these amounts payable to micro & small enterprises, will, if not paid before the year end, get the extended time for payment, till the due date of filing the Income Tax Return.

However on a further reading of the Section, we find that this benefit of extended time will not apply to this new clause (h). In other words, if there are any amounts remaining payable to micro & small enterprises as on 31 March & if they are not paid within the time limits specified in section 15 of the MSMED Act, then these amounts would be disallowed as business expenses, while computing the tax payable of your Business.

This could result in huge tax & interest liability for FY 2023-24, if your Business has large outstanding payables to micro & small enterprises as on 31 March 24.

D. Applicability & Time Limits specified in the MSMED Act, 2006

You may have seen from the above, that clause (h) refers to micro & small enterprises as defined under the MSMED Act.

Those entities with an investment in Plant & Machinery below INR 10 Crores & an Annual Turnover of INR 50 Crores or less, will come under this definition. Many of your Vendors would therefore, based on these thresholds, be ‘Micro & Small’ enterprises. One major exception to this would be ‘Traders’, since only Manufacturers & Service Providers are covered under the definition of ‘enterprise’ as per the MSMED Act.

 

Now, coming to time limits to make the payments. Well, this depends on whether you have an agreement with the micro/small vendor. If there is an agreement, then the time limit would be the time specified as per the Agreement However, in such cases it cannot exceed 45 days (even if the Agreement stipulates a longer credit period). In case there is no Agreement, then the time limit for settling invoices is as short as 15 days!

E. The Pain Points

Various Industry Associations have sent appeals & memoranda to the Prime Minister, Finance Minister & the Industries Minister, requesting re-consideration of the strict timelines for payment to Vendors, which will result in large amounts of expenses being disallowed, which in turn will mean huge Tax & interest liabilities.

Many large businesses who usually enjoy a 60-to-90-day credit period, have started cancelling orders that they had placed on micro & small enterprises during the recent past.

This in turn has had a huge negative impact on such small-scale vendors, who anticipating the usual stream of orders had made purchases of raw materials & consumables.

Hence an amendment that should have helped such vendors improve their liquidity, could actually result in plummeting sales, which in turn will drastically affect their liquidity position !

F. As a business person, what steps should you take now?

  1. First identify your vendors, who are Manufacturers or Service Providers.
  2. Then check with them, if they are Micro or Small enterprises as per the thresholds of investment in Plant & Machinery and Turnover stipulated in the MSMED Act.
  3. If yes, obtain a Declaration from them confirming their status.
  4. Thereafter, make sure you clear their outstanding balance before 31 March 2024 to the extent possible, especially older invoices which would cross the 45-day limit as on 31 March.