Delayed Payments to MSMEs: Impact on Corporate Tax Deductions from FY 2023-24
Starting April 1, 2024, the Indian financial scene will undergo a major change for the Assessment Year 2024-25. This change mainly affects Micro, Small, and Medium Enterprises (MSMEs). It comes from changes made to the Income Tax Act and the Micro, Small and Medium Enterprises Development Act of 2006 (MSMED Act) in resultant to the MSME Samadhaan Proceedings. The essence of this transformation lies in incentivizing timely payments to MSMEs by corporate entities, a move that holds substantial implications for the latter’s tax deductions.
Understanding the Legal Framework
The MSMED Act, specifically under Section 15, stipulates payment terms to MSMEs: 45 days in case of a written agreement and 15 days if there is no written agreement. Despite these clear guidelines, delayed payments for MSME’s have been a recurrent issue, affecting the liquidity and operational efficiency of MSMEs.
Read More: Importance of MSME Samadhaan
In response to this, the Finance Act 2023 introduced an amendment aimed at bolstering the financial stability of MSMEs. As stated by Finance Minister Nirmala Sitharaman in the 2023-24 Union Budget, companies will now get tax deductions for expenses related to payments to MSMEs only if they have actually made these payments. This change specifically focuses on micro and small enterprises. Micro enterprises qualify as businesses that invest no more than one crore rupees in plant, machinery, or equipment and have a turnover of no more than Rs 5 crore. For small enterprises, these thresholds are ₹10 crore and ₹50 crore, respectively.
Read More: MSME Samadhan Portal: Step-by-Step Procedure Delayed Payments
Section 43B of the Income Tax Act and Its Amendments
A crucial element in this development is Section 43B of the Income Tax Act, which traditionally permits certain deductions only upon actual payment. The existing rule permits companies to claim deductions on an accrual basis, as long as they make the payments by the due date for submitting their income tax returns. The new clause (h) in Section 43B, inserted by the Finance Act 2023, alters this dynamic for payments to micro and small enterprises. Now, any sum payable beyond the time limit specified in Section 15 of the MSMED Act will be deductible only upon actual payment, with the proviso to Section 43B not applicable in such cases.
Read More: Best Strategies in filing MSME Samadhaan Proceedings
Industry Perspectives and Implications
This amendment has evoked varied responses from industry experts. One perspective highlights the long-standing challenge of MSMEs in receiving timely payments, with the estimated value of delayed payments reaching a staggering ₹10.7 lakh crore annually. Including these payments under Section 43B ensures timely payments and healthy cash flow for MSMEs. Such conflicts also resulted in recovery actions under MSME Samadhaan Proceedings.
Read More: What are the consequences of non-compliance with MSME Samadhaan regulations?
Another viewpoint emphasizes the amendment’s impact on deferred tax adjustments. The argument is that Section 43B mainly addresses the timing of tax deductions. The amendment may mainly change when these tax deductions are recognized.
A further industry insight points to the additional responsibilities this amendment places on taxpayers and auditors. Companies must now carefully determine which businesses are micro and small enterprises and check if they have paid them within the required 15 or 45 days. If they make payments after this time, even before the income tax return due date, they cannot claim these payments as deductions in that fiscal year. Instead, they can only claim them in the next year.
Read More: How to Resolve Msme Samadhaan Payment Issues?
Conclusion
The amendment to Section 43B of the Income Tax Act, in conjunction with the provisions of the MSMED Act, marks a significant shift in the fiscal regime governing corporate payments to MSMEs including the other remedy under MSME Samadhaan Proceedings. It underscores the government’s commitment to protecting the interests of MSMEs, ensuring they receive payments in a timely manner. For corporates, this translates to a more stringent compliance environment where timely payment to MSMEs becomes not just a matter of business ethics but a financial imperative directly impacting their tax deductions. This change, therefore, is not just a legal amendment but a step towards fostering a more accountable and sustainable business ecosystem in India.
Read More: Why is It Crucial to Seek Legal Advice for Msme Samadhaan Claims?
