Amendments In ITA,1961 Making MSMEs & Big Corporates Jittery

As we approach 31 March 2024, Section 43B(h) of the Income Tax Act has created chaos in the business community, as entities failing to make payments to micro and small enterprises within the prescribed time limits under the Micro, Small and Medium Enterprises Development Act (MSMED), 2006, may face temporary expense disallowances and higher upfront taxes.

According to Section 43B(h) of the Income Tax Act, businesses failing to pay their vendors registered as 'micro' or 'small' (MSE) within 45 days of delivery would not be able to deduct the purchase in the year of purchase. Instead, the deduction can only be claimed in the year of 'actual payment'. This could result in an increase in taxable income and taxes for companies for FY24 due to the disallowance of deductions for unpaid outstanding amounts.

To mitigate the impact of this new statute, companies and vendors are exploring various measures, some of which may not be acceptable under the scrutiny of auditors and tax authorities.

Mitesh Jain, Partner at Economic Laws Practice, stated, “There have been instances where micro and small enterprises are facing order cancellations and loss of business as buyers prefer medium and larger suppliers to avoid implications of Section 43B(h).” Jain further highlighted the uncertainties faced by business owners regarding the applicability of Section 43B(h) in relation to purchases from traders with Udyam Registration and when a specific credit period is agreed upon between the parties.

Jain added, “Section 43B(h) was introduced with a noble intent to improve the cash flow of micro and small enterprises; however, it has proved to be a double-edged sword. Given the difficulties and uncertainties faced by business owners, the applicability of Section 43B(h) may be deferred, and clarifications may be issued by the government in the form of FAQs.”

The recent Interim Budget speech of the Finance Minister highlighted the priority of the Government for the Micro, Small and Medium Enterprises (MSME) sector, considering MSMEs as growth engines of the economy. The Budget speech proposed changes to include payments made to MSMEs within the ambit of Section 43B of the Income-Tax Act, 1961, to promote timely payments and liquidity to MSMEs.

Amit Gupta, Partner at Saraf and Partners, commented, “The amendment to Section 43B of the ITA vide Finance Act 2023 seeks to address the timely payment of amounts to MSMEs. While the amendment aims to ensure better liquidity for MSMEs, it has created frenzy among MSMEs and buyers to avoid missing out on tax deductions."

Gupta further noted, “To streamline compliances, the Central Board of Direct Taxes (CBDT) has subsumed requisite disclosures for MSME registrations and delayed payments to MSMEs in the recently introduced tax return forms for the assessment year 2024-25.”

A large southern association has advised micro and small enterprises (MSEs) to pay their suppliers within 45 days or reclassify themselves as wholesale and retail traders if they cannot meet the deadline. The association emphasised, “Our members are planning to return goods for which payments cannot be made within 45 days and may stop further purchases from MSEs. We believe that the government should not interfere in redefining business relationships based on trust and honour.”

While the law was passed to assist small businesses often paid 60 to 180 days after the delivery of goods and services, leading industry associations from Surat and Maharashtra have expressed concerns. They have made representations to Finance Minister Nirmala Sitharaman and Minister of Micro, Small, and Medium Enterprises Narayan Rane, requesting a one-year deferral of the law and setting the payment period to at least 60 days.