Income tax provision relating to payment to MSME suppliers.

Section 43B(h) of income tax says that with effect from assessment year 2023-024 in respect of any sum payable by an assessee to a micro or small enterprise, a  deduction  while computing the net income under the head business or  profession shall be allowed only when payment is made within the time limit specified in section 15 of the MSME Development Act, 2006 (irrespective of the previous year in which the liability to pay arise)

It further says the first proviso of section 43B shall not apply on such payment which says that deduction of expenses as specified in section 43B shall be allowed,  if payment is made before the due date of filing of return under section 139 (1) of income tax Act.

Meaning thereby:- in respect of any sum payable to a micro or small enterprise, deduction shall be not allowed,  if such payment has been made on or before the due date of filing of return under section 139 (1) of income tax Act,  but not with in the time limit as prescribed in section 15 of MSMED Act .

Now let us know who are the micro or small enterprise, i.e. which supplier shall be known as micro or small enterprise for the purpose of MSMED Act and what is time limit of payment as per section 15 of MSME Act.

Classification of micro or small enterprise

As per section 7(1) of MSMED Act following suppliers as known as micro or small enterprises:-

Note:- It is to be noted here,  that trader has  not been covered as micro or small enterprise.

Explanation-1:- For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

Explanation-2:-It is clarified that the provisions of section 29B of the Industries (Development and Regulation) Act 1951, shall be applicable to the micro and small manufacturer as specified in section  7(1)(a)(i) and 7(1)(a)(ii) i.e. central Government has power to give some relaxation for the categorisation of micro and small enterprises only in case of manufacturer.

Who is the micro or small suppliers for the purpose of MSMED Act & section 43b(h)

As per section 7(1) of MSME Act,  a micro or small  suppliers means a micro or small  enterprises which has filed a memorandum with the authority  (General Manager, District Industries Centre)  or any District Level Officer) as referred in section 8(1), and includes:-

1. The National Small Industries Corporation, being a company, registered under the Companies Act, 1956;

2. the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956;

3. Any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises;

Meaning thereby:- If a micro or small enterprises has not filed a memorandum i.e. not registered with  MSME authorities as notified by the Central or State Government under section 8 (3) and 8 (4),  shall not be treated as supplier for the purpose of this MSME Act,  and accordingly for the purpose of section 43B(h)

Time limit for payment to micro or small suppliers

As per section 15 of MSME Act,  a buyer who purchases goods or service from micro or small  manufacturer or service providers,  the buyer shall make payment therefore on, or before the date agreed upon between him and the supplier in writing, or where there is no agreement in this behalf, buyer shall make payment before the appointed day.

Provided that in no case,  the  period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the day of acceptance of goods or service ,  or the day of deemed acceptance of goods or service.

Meaning thereby:- buyer or supplier may extend the due date of payment  to any period beyond 15 days by making an agreement in writing, but such period cannot be extended for more than 45 days from the day of acceptance,  or the day of deemed acceptance of goods or service.

What is appointed date and how it shall be calculated

As per section 2(b) of MSME Act,  appointed day means the day which comes just after expiry of 15 days from the day of acceptance or the day of deemed acceptance of goods or services by a buyer from a supplier.

Explanation

Day of acceptance of goods or service by the buyer:- day of acceptance means:-

1. The day of the actual delivery of goods or the rendering of services; or
2. Where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier.

Meaning thereby:- if objection is made within 15 days in writing by the buyer, then only,  it shall be deemed that goods or service has not been received to buyer, in such case, date of delivery of goods or service shall be deemed on the date, when supplier removes the objection  of buyers

The day of deemed acceptance:- where no objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services shall be deemed as date of acceptance of goods or service.

Synopsis of section 43B(h)

• Benefit of section 43B (h) is available only to those manufacturer and service providers who is registered as micro and small enterprises with the authority as notified. For registration purposes General Manager of the District Industries centre is the registered authority;
• Benefit of section 43B(h) is not available to traders;
• For taking the deduction of expenses and purchase from from micro or small manufacturer or service providers, buyer has to make payment within 15 days from the date of acceptance of goods or service;
• Such period of 15 days may be extended by  buyer and supplier only by an agreement in writing,  but not exceeding 45 days from the day of acceptance,  or the day of deemed acceptance of goods or services;
• 15 days shall be counted from the date when goods or service is actually received by the supplier
• If goods are defective, and complaint is made by the  buyer in writing, date of acceptance of goods,  shall be date when such defects is removed by the supplier.
• Provision of section 43B(h) applies on all persons like individual, firm, HUF, LLP, Company etc.
• Provision of section 43B(h) shall not apply on persons who declare business income availing presumption scheme like 44AD, 44AE, 44ADA, because in such case,  provision of section 28 to 43C does not apply on them for calculation of income under the head business or profession.
• In the case of Silpi Industries v. Kerala State Road Transport Corporation (Supreme Court), it was held that the enterprise should be registered on the date of supply for availing delayed payment benefits under the MSMED Act.
• It should be noted that although wholesale and retail traders are included in the MSME category, the benefits accorded to them under MSMED Act are limited to priority sector lending. All other benefits, including those related to delayed payments, have not been extended to them. This was clarified by Ministry of MSME through Office Memorandum dated September 01, 2021.
• If the GST component is charged as expenditure, then such GST tax component will be allowed subject to satisfaction of conditions specified in Section 43B(h)  i.e. if  the GST tax component is not charged as expenditure, it is claimed as input tax credit, then provision of section 43B(h) shall not apply on such tax components.
• If a capital expenditure is allowable under other provisions of the IT Act, then it would also be subject to the provisions of Section 43B(h) and will be allowed only on actual payment,  Further, it is important to emphasize that provisions of Section 43B(h) does not apply on depreciation . This view has been supported by Karnataka High Court in the case of PCIT v. Tally Solutions Private Limited,  and by the Bangalore Income Tax Appellate Tribunal in the case of Lemnisk Private Limited v. DCIT, wherein it has been held that the provisions of Section 40(a)(i)/ Section 40(a)(ia), which entails disallowance of expenditure for failure to withholding tax, will not apply to claims of depreciation on capital expenditure.

The tax implication arising under Section 43B(h) on payments made to MSEs under certain situations can be understood from following table:-

Provisions related to interest for late payment:-

As per Section 16 of the MSMED Act, where any buyer fails to make payment of the amount to the supplier, as required to be made under section 15, in such case, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, the buyer shall, be liable to pay compound interest with monthly rests to the supplier on that amount, from the appointed day or  from the date as agreed upon, at 3 times of the bank rate notified by the Reserve Bank.

Amount payable to Micro and Small Enterprises will have to be shown separately in the balance sheet

As per Section 22 of the MSMED Act, every purchaser who is obliged under any law to get his books of accounts audited shall furnish the following additional information in his statement of annual accounts:-

1. The principal amount outstanding and the interest payable thereon (to be shown separately) payable to Micro and Small Enterprises at the end of each accounting year;
2. The amount paid after the due date,  and the amount of interest paid under section 16 during each accounting year;
3. Detail of payment made after the due date, and on which interest is payable under section 16, but the payment is made without interest;
4. The amount of interest which has become payable at the end of the year but which remains to be paid;
5. The amount of interest that remains to be paid and will be payable in future years and which cannot be calimed as an expenses as per section 23 of MSMED Act

CA Anil Goyal