Income Tax update regarding payment to MSME Parties (Section 43B(h)

Applicable to which assesse
This section is applicable to all assesse, except the below ones:
a) Where the assesse is an Individual, Proprietorship firm, HUF or Partnership Firm, calculating profit under Presumptive Taxation Scheme, i.e. 8% of total turnover or gross receipts.
b) Where the payment is for any purpose other than sec 28, i.e. Profits and Gains from Business or profession. If the expense is being claimed under the head Income from Salary, House Property, Capital Gains, Other Sources
c) If the dues are for purchase of any capital asset which is not being claimed as a deduction from Profits and Gains from Business or Profession
This means that if an assesse, is having a business where gross turnover is less than 2 crore rupees (3 crore in case total amount received in cash does not exceed 5% of total turnover/receipt) and profit is computed at 8% (6% for amount received through bank) of turnover, then this section is not applicable.

Which MSME are covered for this section
This section is applicable only for Micro and Small Enterprise registered under the MSMED Act. This means that this is not applicable to Medium Enterprise:
a) Micro Enterprise – Investment in Plant and Machinery or Equipment, less than Rs.1 crore and Annual Turnover is less than Rs. 5 crore
b) Small Enterprise – Investment in Plant and Machinery or Equipment, less than Rs.10 crore and Annual Turnover is less than Rs. 50 crore
This section only applies to Manufacturing Enterprises and Enterprise rendering services, which means that this section is not applicable for Traders, even if they are registered and are Micro or Small Enterprise

How to check if a party is MSME
The assesse must ask the MSME certificate from the supplier and check the following:
a) If there is a valid registration and registration is active
b) If the Major Activity is Services/Manufacturer. If it is Trader then the provisions do not apply
c) If the Type of Enterprise is Micro, Small or Medium. If it is Medium then the provisions do not apply
To check the details of the supplier, the assesse can go to this link and check the details:
https://udyamregistration.gov.in/udyam_verify.aspx

What are the provisions of this section
The new provisions says that, any amount payable to Micro and Small enterprise as on 31st March, beyond the time period specified, shall not be allowed as deduction from income
To understand this, first we have to understand what is the time period specified for payments:
I. In case there is contract/agreement/PO/any type of agreement, the credit period agreed, which shall not be more than 45 days. If the credit period in contract is 30 days, the time period specified shall be 30 days. However, if the credit period in contract is 90 days, the time period specified shall be considered as 45 days
II. In case there is no agreement, then the period specified shall be deemed to be 15 days, i.e. payment has to be done within 15 days of acceptance of goods or service

What are the consequences of non-payment within time period specified
If the payments are not made within the time period specified as on 31st March, then,
a) Such expense shall not be allowed as deduction in current year
b) The MSME party has to be paid interest for delay payment at 3 times the bank rate which is 6.75% currently, i.e. 20.25%
c) Interest on delay payment is not allowed as deduction of expense in Income Tax
d) Such expense shall be allowed as deduction in the year in which the amount is paid
e) The relaxation of payment till the date of return filing or tax audit, is not applicable
f) The Tax auditor is required to report in their tax audit report, details of all such amount which was payable within the time specified and has not been paid

Is benefit lost or deferred
In case the payment is not done within the time period specified, then that amount shall not be allowed as deduction in the current year.
However, the deduction shall not be lost and shall be allowed in the year in which it is actually paid.

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Article Compiled by:-

Meharia & Associates | Chartered Accountants
Martin Burn House, Room No. – 25 1, R.N. Mukherjee Road, Kolkata – 700001,
Email – mehariaassociates@gmail.com | Ph – 9681354521, 9432117371