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Disallowance If Delayed Payments To MSME Vendors - Important - Taxguru - in

The document discusses proposed amendments to Section 43B of India's Income Tax Act regarding deductions for delayed payments to micro, small, and medium enterprises (MSMEs). Specifically: 1) The Finance Bill 2023 proposes to disallow deductions for any payments to MSMEs beyond the 45 day limit for such payments under the MSMED Act, unless actually paid. 2) Previously such interest payments were considered penal and non-deductible, but this aims to incentivize timely MSME payments. 3) The amendment will take effect from April 1, 2024 and apply to assessment year 2024-25 onwards regarding payments falling due on or after that date. Payments delayed prior to then

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171 views3 pages

Disallowance If Delayed Payments To MSME Vendors - Important - Taxguru - in

The document discusses proposed amendments to Section 43B of India's Income Tax Act regarding deductions for delayed payments to micro, small, and medium enterprises (MSMEs). Specifically: 1) The Finance Bill 2023 proposes to disallow deductions for any payments to MSMEs beyond the 45 day limit for such payments under the MSMED Act, unless actually paid. 2) Previously such interest payments were considered penal and non-deductible, but this aims to incentivize timely MSME payments. 3) The amendment will take effect from April 1, 2024 and apply to assessment year 2024-25 onwards regarding payments falling due on or after that date. Payments delayed prior to then

Uploaded by

Rupeshkumar Jha
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© © All Rights Reserved
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DISALLOWANCE IF DELAYED PAYMENTS TO MSME

VENDORS -IMPORTANT
AUTHOR :CA ANKUSH JAIN

https://taxguru.in/income-tax/disallowance-delayed-payments-msme-vendors-important.html

INTRODUCTION:

Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) provides
that where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer
shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for
the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount
from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at
three times of the bank rate notified by the Reserve Bank.

Section 15 of the MSMED Act provides that in no case the period agreed upon between the supplier and the
buyer for payment of invoice in writing shall exceed forty-five days from the day of acceptance or the day of
deemed acceptance.

The “Appointed day” means the day following 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.

Section 23 of MSMED Act has specifically prohibited the assessee from claiming the deduction from the income
on account of interest paid to MSME.

Section 24 of MSMED Act provides that sections 15 to 23 shall have effect notwithstanding anything
inconsistent therewith contained in any other law for the time being in force.

It will not be out of context to mention that The Companies Act, 2013 provides that a Company must file e-form
MSME-1 every half year with Registrar of Companies mentioning all the transaction, wherever payment made
after 45 days and is also required to give certain additional information in its financial statements.

PRINCIPAL vs. INTEREST ON DELAYED PAYMENT

Sections 15 to 24 of the MSMED Act make a buyer liable to pay interest but they, by themselves, do not require
the buyer to make payment to the supplier. However, as payment of such interest is considered as penal in
nature, no deduction is allowed under section 37 of the Income Tax Act, 1961 (hereinafter referred to as “the
Act”).

AMENDMENTS PROPOSED BY FINANCE BILL, 2023

In order to promote timely payments to micro and small enterprises, the Finance Bill, 2023 (hereinafter referred
to as “the Bill”). proposes to include payments made to such enterprises within the ambit of section 43B of the
Act. Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that any sum
payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the
MSMED Act shall be allowed as deduction only on actual payment.

However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.

IMPACT OF THE PROPOSED AMENDMENT

Section 43B of the Act provides that deduction for certain sums specified in its clauses (a) to (g) is allowable
only on actual payment. However, the Proviso to this section allows deduction on accrual basis if the specified
sum is paid by due date of furnishing of the return of income. The sums covered by clauses (a) to (g) may have
fallen due for payment before the close the financial year and remain unpaid at the end of the year. In respect of
these sums, section 43B is not concerned whether the payments had fallen due or not before the end of the
financial year. The Section and the proviso thereto read together provide that deduction is allowable if the actual
payment is made by the due date of furnishing the return of income.

But so far as the sum covered by the proposed clause (h) is concerned, the payment of the principal sum due to a
Micro and Small Enterprise must be made within the time limit specified in section 15 of the MSME Act so as to
qualify for deduction.

The Finance Bill states that proviso to section 43B will not apply to such payments. But it was not necessary to
state so. It seems that Government is stated this as a measure of abundant precaution in view of controversies
that arose in the past regarding employees’ contributions to provident funds.

It should also be noted that if sums remaining unpaid to the Micro and Small Enterprises at the end of the year
for a period of less than 15 days or 45 days, as the case may be, shall not attract section 15 of the MSME Act and
therefore, will not attract the provisions of clause (h) of section 43B of the Act.

APPLICABILITY

The Bill provides that this amendment will take effect from 1st April, 2024 and will accordingly apply to the
assessment year 2024-25 and subsequent assessment years. It means the proposed amendment will apply to
payments falling due on or after 1st April, 2024 and not to the unpaid amounts brought forward from past years
on 1st April, 2024.rding employees’ contributions to provident funds.
It should also be noted that if sums remaining unpaid to the Micro and Small Enterprises at the end of the year
for a period of less than 15 days or 45 days, as the case may be, shall not attract section 15 of the MSME Act and
therefore, will not attract the provisions of clause (h) of section 43B of the Act.

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