Understanding the Impact of MSME Section 43B: Ensuring Timely Payments and Tax Compliance”

Clarification on MSME Section 43B Impact:

Payments made or due to vendors registered under MSME, as defined in the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, are affected. To encourage timely payments to micro and small enterprises, such payments now fall under section 43B of the Income Tax Act, 1961, as per the Finance Act 2023. A new provision (clause h) in section 43B stipulates that any sum payable to a micro or small enterprise beyond the time limit set in section 15 of the MSMED Act will only be deductible upon actual payment. Section 15 of the MSMED Act mandates payments within agreed-upon timeframes, not exceeding 45 days. If no agreement exists, payment should be made within 15 days. If creditor payments exceed 45 days or 15 days from invoice for services or goods acceptance (GRN), the expense will be disallowed for the relevant year but allowed when payment is made. Unlike standard section 43B deductions, expenses under 43B(h) are deductible only when paid, not necessarily by the due date of filing returns. Steps include identifying Micro and Small vendors through MSME certification. Agreements or documented payment terms are essential; otherwise, defaults will be assumed at 15 days. Payment terms from purchase orders can apply, limited to 45 days. Consider bill discounting to settle dues within permitted timeframes. Failure to ascertain MSME vendor status may prompt Tax Auditors to highlight this in Form 3CD, leading to expenditure disallowance/addition during assessments and potential penalties.