Section 43B(h) – Kahin Khushi Kahin Gham

Micro, Small and Medium Enterprises (MSME) are the backbone of the Indian economy. The share of MSME Gross Value Added (GVA) in the all-India Gross Domestic Product (GDP) during the years 2019–20, 2020–21 and 2021–22 was 30.5 per cent, 27.2 per cent and 29.2 per cent, respectively. The share of MSME manufacturing output in all India Manufacturing output during the years 2019–20, 2020–21 and 2021–22 was 36.6 per cent, 36.9 per cent and 36.2 per cent, respectively. The share of export of MSME-specified products in all India exports during the years 2020–21, 2021–22 and 2022–23 was 49.4 per cent, 45.0 per cent and 43.6 per cent respectively.¹ As of 2nd August, 2023, the total number of persons employed by MSMEs was over 123.6 million people.

1. https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1946375

This shows the importance of the MSME sector in the development of the Indian economy. The government is aware of these facts and hence, has offered a slew of incentives and launched several schemes to help, protect and promote the interests of MSMEs. The schemes / programmes inter alia include the Prime Minister’s Employment Generation Programme (PMEGP), the Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE), the Micro and Small Enterprises-Cluster Development Programme (MSE-CDP), the Entrepreneurship Skill Development Programme (ESDP), the Procurement and Marketing Support Scheme (PMS) and the National SC/ST Hub (NSSH).

However, despite these schemes, the challenges faced by this sector are humungous. Some of the major challenges faced by MSMEs are a constraint of resources in terms of finance, human resources, technology and so on. If only these challenges are addressed, the share of MSMEs in the GDP of the Indian economy can be increased up to 50 per cent from the present 30 per cent or so. One of the advantages of the MSME sector is that it is labour-intensive and generates employment, which can be seen from the abovementioned figures. A cash-rich company is King in any industry, more so for the MSME sector. With the objective of helping Micro and Small Enterprises (Medium Enterprises are excluded) expedite their collections and improve their cash flows, a new clause (h) was introduced in section 43B of the Income-tax Act, 1961, w.e.f. 1st April, 2024. Accordingly, any payment outstanding at the year-end (e.g., 31st March, 2024) and paid beyond the due date prescribed under section 15 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED) is to be allowed as a deduction only in the year of payment. Section 15 of the MSMED Act provides the due date of payment as per the terms of the agreement or 45 days from the date of acceptance or deemed acceptance, whichever is earlier and within 15 days from the date of acceptance or deemed acceptance where there is no agreement². These timelines are applicable across the board without any exceptions. Thus, payments made by one MSME to another Micro or Small Enterprise would also be subject to provisions of section 43B(h). Industries and businesses have not received these provisions requiring adherence to stringent timelines well for various reasons. The normal payment cycle is six months in some industries, e.g., textiles. Even FEMA provides nine months to realise export proceeds. Ninety days is the normally accepted period for the settlement of dues in various industries. Thus, 45 days is perceived to be too short a period for the settlement of dues of MSMEs.

2. Please refer to the separate Article in this issue of the Journal for the criteria for determining MSME, important provisions under the MSMED Act, 2006 and various issues arising from the amendment of section 43B of the Income-tax Act, 1961.

The Memorandum explaining the Finance Bill 2023 justifies the insertion of clause (h) in section 43B as a part of the Socio-Economic Welfare Measures. It states, “To promote timely payments to micro and small enterprises, it is proposed 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 Micro, Small and Medium Enterprises Development (MSMED) Act 2006 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.” The proviso to section 43B of the Income-tax Act, 1961, allows deduction on an accrual basis for various items if the amount is paid by the due date of furnishing of the return of income — this exclusion does not apply to micro and small enterprise dues. The reason for this provision seems to be to not grant time beyond what is prescribed under the MSMED Act. Whereas MSMEs should be happy with this provision, some also fear the loss of contracts from big companies, unless they deregister as MSMEs. The protection is available only to an MSME that qualifies as a “supplier” under section 15 of the MSMED Act. A “supplier”, as per section 2(n) of the MSMED Act, is that Micro and Small Enterprise which has filed a memorandum with authority referred to in section 8(1) (i.e., Udyam Registration). Thus, Udhyam Registration is a must to get protection under section 43B(h) of the Income-tax Act, 1961.

Another taxing issue for the tax auditor is to report such disallowances in Form 3CD. It will be extremely difficult to obtain information about the status of all suppliers in a large corporation. This is an additional burden on otherwise stretched tax auditors. Auditors will have to rely on the declarations filed by the MSMEs or representations made by the client. Detailed guidance from the ICAI will be useful to auditors. ICAI should consider how much responsibility be cast on tax auditors, and some portions of the tax audit report should be in the form of declarations / representations by the clients instead of certification of each and every figure by a tax auditor in Form 3CD. Micro and small enterprises should mention their Udyog Registration Number on their invoices, and the buyer or recipient of services should obtain a copy of such certificate on record.

In conclusion, the insertion of clause (h) in section 43B is with good intentions; however, considering varied practices across the industries, the proviso to section 43B, as applicable to other payments, should also be extended to Micro and Small Enterprises, allowing deduction of payments made before the due date of filing of the return. As demanded by various trade associations, the provisions may be deferred by one year so that sufficient time period is available for businesses to align with these provisions.

An amendment of this nature that significantly impacts businesses should be carried out only after consultation with stakeholders.

Election is around the corner, so we do not have a full-fledged budget this year. We await the full budget to be presented by the newly elected Government.