Disallowance Of Delayed Payment To Micro And Small Enterprises

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Section 43B of Income Tax Act allows certain expenses only when the payment is made for the same. The Union Budget of 2023, inserted a new clause (h) in Section 43B of the Income Tax Act, dealing with disallowance of delayed payments to micro and small enterprises w.e.f. FY 2023-24 which is reproduced below:

(h) 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 Act, 2006 (27 of 2006), shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

Micro and Small Enterprises as defined under MSMED Act, 2006 (revised on 13th May 2020) are classified based on Investment in Plant & Machinery and turnover.

  • whose investment in Plant & Machinery is less than or equal to Rs 1 crore and turnover is less than or equal to Rs 5 crore are classified as micro enterprises.
  • whose investment in Plant & Machinery is less than or equal to Rs 10 crores and turnover is less than or equal to Rs 50 crores are classified as small enterprises

Time limit for making the payment –

As per section 15 of MSMED Act, the time limit for making the payment by the buyer to supplier should be as agreed upon between them, which should not exceed 45 days from the day of acceptance. In case there is no agreement the time limit for making the payment is 15 days from the date of acceptance of the bill.

Key points to Amendments:

  1. The amendment is applicable only to amounts payable to only micro and small enterprises. Medium enterprises are not covered under this clause.
  2. As the new clause only covers the enterprises covered under MSMED Act, the traders will not be covered as there is no provision for traders in MSMED Act.
  3. Unlike other clauses of section 43B, where if the payment is made on or before the due date of filing the return, the same is allowed as expense. However, under clause (h) of the section the payment has to be made within the time limit specified under MSMED Act and if the payment is made after that the same will be allowed in the financial year in which it is paid.

After this amendment, it is important that all the taxpayers should clearly classify its creditors in books of accounts which fall under micro and small categories and make timely payments to them to avoid any disallowance of expenses. This will help them to correctly compute their tax liabilities and avoid any mistakes. Manufacturers and service providers who fall within the threshold provided in MSMED Act, should register under the act and take benefit of the same.

This will also result in additional workings for Chartered Accountants to report the transactions falling under the above classification.

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CA Abhishek D Mundhra Chartered Accountant
Abhishek D Mundhra is a Chartered Accountant with 12+ years of post-qualification experience with expertise in the field of GST and other Direct and Indirect Taxes.

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