Tax Matters:Section 43B(h)Income Tax Act:Implications for Businesses.

Tax Matters: New Clause (h) in Section 43B of IT Act: Implications for Businesses and MSME Payments

The Indian government introduced a significant amendment to the Income Tax Act, 1961, with the insertion of clause (h) in Section 43B. This new clause, effective from April 1, 2024 (Assessment Year 2024-25), aims to address the critical issue of delayed payments to Micro, Small, and Medium Enterprises (MSMEs).

Tax Matters: Understanding the Clause:

Clause (h) stipulates that any sum payable to a registered MSME beyond the timeframe specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, will not be considered a tax-deductible expense in the year the liability is incurred. In simpler terms, companies can only claim tax deductions for payments made to MSMEs within the stipulated deadlines set by the MSMED Act.

Tax Matters: Corresponding MSME Act Provision:

Section 15 of the MSMED Act mandates that payments for goods or services supplied by an MSME must be made:

• Within 15 days from the date of acceptance of the goods or services if there is no written agreement between the buyer and seller.

• Within the timeframe agreed upon in a written agreement, which cannot exceed 45 days from the date of acceptance.

Remedial Actions for Businesses:

In light of this new clause, businesses need to take immediate action to ensure timely payments to MSMEs and avoid potential tax implications. Here are six key actions:

1. Review existing payment terms:  Ensure all agreements with MSMEs adhere to the timelines specified in the MSMED Act.

2. Prioritize timely payments: Integrate prompt payment practices into your financial processes to avoid delays.

3. Communicate clearly:  Inform MSME vendors about the new clause and the importance of adhering to payment deadlines.

4. Implement early payment incentives: Consider offering early payment discounts to encourage faster settlements.

5. Explore alternative financing:  If cash flow challenges hinder timely payments, explore alternative financing options.

6. Seek professional guidance: Consult tax advisors or financial consultants for comprehensive guidance on complying with the new clause and managing its impact.

Conclusion:

The new clause (h) in Section 43B is a positive step towards ensuring financial stability for MSMEs. Businesses must adapt their practices and prioritize timely payments to comply with the regulations and maintain healthy relationships with their vendors. By taking proactive measures, businesses can navigate this change effectively and contribute to a more supportive ecosystem for the MSME sector.