The Finance Act 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro, Small and Medium Enterprises (MSME) for goods supplied or services given may be deducted in the same year if it is paid within the deadline stipulated by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
This amendment aims to address the issue of working capital scarcity in the MSME industry and promote prompt payments to micro and small businesses. The assessment year 2024–2025 and any following years will be covered by this change, which will come into effect on April 1, 2024
MSME Section 43B (h): New MSME 45 Days Payment Rule
The newly added clause (h) states that any sum payable by the assesses to a MSME beyond the time limit set in Section 15 of the MSMED Act, 2006, is eligible for deduction.Â
This deduction is applicable in the previous year when the sum is actually paid. Clause (h) of Section 45B essentially states that any sum payable by a larger enterprise or entity to a registered MSME beyond the stipulated deadlines won’t be considered a deductible expense in the year the liability was incurred.
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, 2024.
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.
Section 43B (h) Effective Date
The applicability of clause (h) of Section 43B is from April 1, 2024. This amendment is made applicable from assessment year (AY) 2024-25, that is, Financial Year (FY) 2023-24.
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.
Example of Section 43B (h)Â
Sr. No. | Day of acceptance 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 |
Penalties for Failure to Pay MSMEs Within the Time Frame
In the case of late payment to an MSME, interest is applicable.
Rate of interest:Â Compound interest at the times of the bank rate notified by the Reserve Bank of India (RBI).
Date from which interest is payable:Â Appointed day or the date as per the agreement, as the case may be.
Deduction of this interest is not allowed as an expense, as per the Income-Tax Act (ITA), 1961.