As you may be aware, the government has been introducing various measures to support and strengthen the MSME sector, recognizing its significant contribution to the economy. One such measure is the inclusion of Section 43B(h) in the Income Tax Act, which pertains to the non-deductibility of certain Expenses/Purchases if the corresponding payments are not made to MSMEs within the stipulated time frame of maximum 45 days from the date of bill submission by your vendors.
Section 43B(h) states that any sum payable by the assessee to an MSME, as defined under the Micro, Small and Medium Enterprises Development Act, 2006, shall be allowed as a deduction only if it is actually paid on or before the due date of 45 days from the date of bill submission by your vendors.
In simpler terms, if your business owes payments to MSMEs for goods or services rendered, it is crucial to ensure that these payments are made within the timelines prescribed by the MSME Development Act to avail of tax deductions.
Failure to comply with the timelines specified may result in the disallowance of deductions for such expenses, thereby potentially increasing your tax liability. Therefore, it is imperative to stay informed about your obligations regarding MSME payments and ensure timely settlement to avoid any adverse consequences.
We are committed to assisting you in navigating through regulatory changes and ensuring compliance with relevant laws and regulations. Should you have any questions or require further clarification regarding Section 43B(h) or any other matter related to MSME payments, please do not hesitate to reach out to us.
We invite you to go through the detailed information here along with important FAQs for your understanding of the section.
1. Section 43B (h) Applicability
This clause is applicable when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. Notably, the registration of the buyer under the MSMED Act, 2006, is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2023. The payments that go beyond the specified time limit under Section 15 of the MSMED Act are covered under this clause and are allowed as deductions only upon actual payment.
The newly added clause (h) in Section 43B specifically covers any sum payable by the assessee to a micro or small enterprise.
2. Section 43B (h) Applicability on Traders
As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. So, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of enterprise.
3. Section 43B (h) Time Limit
Business enterprises are required to pay MSMEs within 45 days, as per section 15 of the MSMED Act, 2006, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. In case there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
4. Example of Section 43B (h)
| Sr. No. |
Day of acceptance of any goods or services by a buyer from a supplier |
|
Credit period (Days) |
Actual date of payment |
Deduction allowed in which FY |
| 1 |
29/03/2024 |
|
60 |
25/05/2024 |
FY 2024-25 |
| 2 |
01/04/2024 |
|
45 |
21/05/2024 |
FY 2024-25 |
| 3 |
31/01/2024 |
|
15 |
20/02/2024 |
FY 2023-24 |
| 4 |
11/09/2023 |
|
20 |
03/10/2023 |
FY 2023-24 |
| 5 |
30/11/2023 |
|
30 |
20/12/2023 |
FY 2023-24 |
| 6 |
21/04/2024 |
|
40 |
20/06/2024 |
FY 2024-25 |
| 7 |
15/12/2023 |
|
– |
05/04/2024 |
FY 2024-25 |
| 8 |
10/11/2023 |
|
– |
30/11/2023 |
FY 2023-24 |
5. What is the Ultimate effect of Non payment within 45 days or agreement date whichever is earlier?
The tax auditor shall be required to report unpaid dues to micro and small enterprises in Form 3CD of the Tax Audit Report. The assessee shall be required to add back to its total income the disallowance reported in Form 3CD of its Tax Audit Report.
In case the business enterprise does not make payments to Micro, Small and Medium Enterprises (MSME) in the above prescribed period, then it has to make payment of compound interest at monthly interests to the supplier at three times bank interest as same is notified by the Reserve Bank of India (RBI).
6. Can payments made after the due date be carried forward for deduction?
Payments that go beyond the specified time limit under Section 15 of the Micro, Small and Medium Enterprise Development (MSMED) Act. 2006, are covered under clause (h) of Section 43B and are allowed as deductions only upon ‘actual payment’.
7. How is SMALL or MICRO category of the vendor decided
| Category of
Enterprise |
Criteria for classification |
| Micro Enterprise |
· Net investment in plant and machinery or equipment does not exceed Rs 1 crore; and
· Net turnover does not exceed Rs 5 crores. |
| Small Enterprise |
· Net investment in plant and machinery or equipment does not exceed Rs 10 crore; and
· Net turnover does not exceed Rs 50 crores. |
8. What is the time limit prescribed under Section 15 of the MSMED Act for making payment?
Section 43B(h) refers to the limitation period specified under Section 15 of the MSMED Act, which provides that where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing. However, this agreed date cannot exceed 45 days.
If there is no agreement on this behalf, the buyer shall make the payment before the appointed day.
As per Section 2(b) of the MSMED Act, “appointed day” means the day immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
For example, where goods are supplied and accepted on 30-03-2024, the due date for payment under Section 15 of the MSMED Act shall be computed as follows:
| Date of acceptance of supply |
Credit period |
Due date for payment |
Remarks |
| 30-03-2024 |
30 days |
28-04-2024 |
Due date as per terms of the agreement |
| 30-03-2024 |
60 days |
13-05-2024 |
Due date cannot exceed 45 days from the date of acceptance |
| 30-03-2024 |
No agreement |
13-04-2023 |
In the absence of an agreement, the due date cannot exceed 15 days from the date of acceptance |
9. Should terms mentioned on the invoice or purchase order be treated as an agreement?
The MSMED Act does not define the term ‘agreement’. Thus, it can be said that agreement can be written as well oral. In common parlance, an agreement means when one person makes an offer and another person agrees to it. It includes terms like due dates, acceptance of goods/services, consequences for late payment, and dispute resolution. So, if an invoice or purchase order has these details, it can be seen as an agreement.
10. What is meant by the terms “the Appointed Day”, “the day of acceptance”, and “the day of deemed acceptance”?
The “appointed day” is relevant only if the buyer and the seller have not agreed to any due date for payment in writing. As per Section 2(b) of the MSMED Act, “appointed day” means the day immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
The following points are noteworthy:
- “The day of acceptance” means the day of the actual delivery of goods or the rendering of services;
- Where any objection is made in writing by the buyer regarding the acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, “the day of acceptance” means the day on which the supplier removes such objection;
- “The day of deemed acceptance” means where no objection is made in writing by the buyer regarding the acceptance of goods or services within fifteen 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.
- What does the term “Supplier” mean in Section 15 of the MSMED Act
Section 2(n) defines “supplier” to mean a micro or small enterprise that has filed a memorandum with authority referred to in Section 8(1) (i.e., Udyam Registration).
It must be noted that only micro and small enterprises that are Udyam-registered are considered suppliers for the purpose of Section 15 of the MSMED Act. Further, they shall be regarded as suppliers, in respect of goods supplied by them or services rendered by them on or after the date of Udyam Registration. Udyam Registration is not retrospective.
- Is the disallowance under Section 43B applicable if supplies are made before obtaining Udyam registration?
Section 43B(h) will not apply with respect to payments for supplies made before the date of Udyam Registration. He would be regarded as a micro-enterprise only from the date of obtaining such registration as Udyam Registration does not operate retrospectively.
- Will the disallowance apply to the sum payable to retail traders or wholesalers?
Para 2 of Office Memorandum: No. 5/2(2)/2020/E/P&G/POLICY dated 2-7-2021 issued by Central Government has clarified that “The Government has received various representations and it has been decided to include Retail and wholesale trades as MSMEs and they are allowed to be registered on Udyam Registration Portal. However, benefits to Retail and Wholesale trade MSMEs are to be restricted to Priority Sector Lending only.” Central Government’s office memorandum 1/4(1)/2021- P&G Policy, dated 01.09.2021, further clarifies that “the benefit to Retail and wholesale trade MSMEs are restricted up to priority sector landing only and other benefit, including provisions of delayed payment as per MSMED Act, 2006, ARE EXCLUDED.
In view of the above Office Memorandum, dated 01.09.2021, a Supplier who is a micro or small enterprise cannot be treated as “Supplier” for section 15 and section 43B(h) purposes if his Udyam Certificate shows his activity as only a trader.
Although there does not appear to be any legal basis in MSMED Act for the Office Memorandum and Wholesale & Retail Trade are treated as distribution services under GATT/WTO, the above position will prevail till any Trader/Traders body challenges the OM in Court and gets it quashed.
- Will the GST component be disallowed if the sum payable to MSE attracts Section 43B(h) disallowance?
If the sum payable to the Micro or Small Enterprise includes GST, the disallowance is restricted to the amount excluding GST if the GST is claimed as Input Tax Credit (ITC) in the books of accounts. However, if the buyer opts not to claim the input tax credit under GST and treats it as an expense in its Profit and Loss account, deduction against GST will only be allowed based on actual payment.
- Will Micro or Small Enterprises having Udyog Aadhaar Memorandum or EM-II be regarded as micro or small enterprises for Section 43B(h) purposes?
UAM or EM-II Registration was valid only up to 30-06-2022. These registrations are not valid with effect from 01-07-2022. There is no process of automatically migrating the enterprises from UAM/EM-II to Udyam Registration unless the enterprise files Udyam. Therefore, enterprises with UAM/EM will not be regarded as micro or small enterprises for Section 43B(h) purposes.
- Does Section 43B(h) apply with respect to the amounts due towards the purchase of Capital Goods?
Unlike Section 37(1), the deductibility under Section 43B is not linked to the distinction between capital expenditure and revenue expenditure. Section 43B applies to sums payable in respect of which a deduction is otherwise allowable under this Act.
- Whether disallowance attracts if the assessee opts for a presumptive taxation scheme under Section 44AD, Section 44ADA, Section 44AE, etc.?
Section 43B(h) begins with a non-obstante clause “notwithstanding anything contained in any other provision of this Act”. Therefore, apparently, Section 43B overrides all provisions of the Act including provisions of presumptive taxation under Section 44AD, Section 44ADA, Section 44AE, Section 44BBB and Section 115VA (Tonnage Tax)
However, Sections 44AD, 44ADA, 44AE, 44BBB and 115VA also begin with non-obstante clauses as ‘Notwithstanding anything to the contrary contained in Sections 28 to 43C,…….’
Therefore, Section 43B(h) overrides all other provisions of the Act except Sections 44AD, 44AE, 44ADA, 44BBB and 115VA. Therefore, Section 43B(h) will not apply to eligible assessee-buyers who opt for presumptive taxation under Sections 44AD, 44AE, 44ADA, 44BBB or 115VA.
- What if a 50% advance is given in the current year, and the balance of 50% is paid to the MSE supplier at a later date?
If the taxpayer settles 50% of the remaining balance during the fiscal year, even after the due date under Section 15 of the MSMED Act has passed, no disallowance will occur. However, if this 50% remains outstanding at year-end and is paid after the due date, disallowance would apply to this portion payable to MSEs.
- What if the cheque is handed over to the MSEs on or before the due date, but it is encashed by them after the due date?
As per accepted commercial usages, payment is regarded as made on the date the cheque is handed over to the payee, provided the cheque does not bounce subsequently. Therefore, in such cases, payment will have to be treated as made within the due date.
- Will Section 43B(h) apply to an assessee who is also a Udyam-Registered Micro or Small Enterprise?
Yes. There is no exemption for buyers who are Micro or Small enterprises. It cannot be said that Section 43B(h) applies only to medium or large enterprise buyers.
ALL THIS IS FINE BUT WHAT TO DO?
- IF YOU ARE PURCHASER FROM MANUFACTURER OR SERVICE PROVIDER
- Ask whether the vendor has Udyam Aadhar
- Check if he is "Micro" or "Small" as defined above
- If point 2 above is applicable, make payment before expiry of 45 days from the date of bill received or date of acceptance or deemed acceptance by you from the Seller.
2. IF YOU ARE SELLER AND REGISTERED UNDER UDYAM AADHAR
Simply send your Udyam Aadhar Certificate to the Purchaser along with link to this article (for them to understand)
Please note, the information on this website is only for knowledge purpose and should not be relied upon as legal advice or opinion.
