This article has been written by Pratheeswaran D pursuing a Diploma in International Taxation and Transfer Pricing from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction 

The Finance Bill 2023 contains various amendments with the motive of developing the Indian economy. One of the amendments among the various amendments is Section 43 of the Income Tax Act of 1961. This amendment was introduced for the benefit of MSMEs, which contribute almost 30% of India’s GDP. The main aim of the amendment is to ensure payment to the MSME sector in a timely manner, which in turn helps the MSME sector manage their working capital in a better way. “This amendment is important because the MSME sector helps the industrialisation of the rural area, which in turn helps to create more employment opportunities for the people in the rural area in a cost-efficient manner.”

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The role of micro, small and medium enterprises (MSMEs) in nation-building

The MSME sector is an important pillar of the Indian economy as it contains a large number of networks of 30 million units, creates employment of 70 million, manufactures more than 6,000 products, contributes almost 45% to the manufacturing output and 40% of the exports of the country directly and indirectly. The contribution of the MSME sector is crucial for the Indian economy to reach the $5 trillion mark.

Problems faced by MSMEs in India

The delayed payments from the supplier severely affect the financial well-being of the MSME sector. The total amount that is payable to the MSME sector is Rs.  15 lakh crore, and this amount accounts only for a small percentage of the MSMEs that are registered (the total number of MSMEs that are registered in India is 13% of the total number of MSMEs). This is very severe among microenterprises, which experience delayed payments 80% of the time. This delayed payments mostly beyond the statutory time limit of 45 days. 45% of the delayed payments are beyond the time limit of 180 days from the product or service delivery.

Inadequate infrastructure facilities, transportation facilities, and a lack of market facilities pose a very challenging situation for MSMEs.

The most important challenge faced by the MSME sector is the availability of manpower and the availability of skilled manpower is very difficult, as it is very important to prove their competitiveness.

Initiatives taken by the government to tackle the problems

The government has taken various steps to tackle the problems faced by MSMEs. Some of the initiatives are listed below:

  • The Pradhan Mantri Mudra Yojana (PMYY) provides collateral loans to MSMEs.
  • The Make in India campaign promotes manufacturing at home and incentivises MSMEs to take part in the worldwide supply chain.
  • Digital India offers digital infrastructure to MSMEs, such as e-commerce, digital marketing, and digital advertising.

Section 22 of the MSMED Act mandates that where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish additional information in the annual statements of accounts, namely: 

  • The principal amount and interest due thereon (to be shown separately) remain unpaid to any supplier as of the end of each accounting year.
  • The amount of interest paid by the buyer in terms of Section 16, along with the amount of payments made beyond the appointed day during each accounting year.
  • The amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act.
  • The amount of interest accrued and remaining unpaid at the end of each accounting year, and 
  • The amount of further interest remaining due and payable even in the succeeding years, until such date as the interest dues as above are actually paid to the small enterprise.

Understanding the industries and enterprises

ClassificationCriteriaMICROSMALLMEDIUM
Manufacturing enterprises and enterprises providing servicesInvestment in plant and machinery or equipment.<1 crore<10 crores<50 crores
Turnover<= 5 crores<= 50crores<=250 crores

Payment timelines for MSMEs

Before this proposed amendment, the government had already implemented various measures to improve the cash flows of MSMEs. As per Section 15 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSME Act, 2006), buyers are responsible for paying the suppliers within 15 days if there is no agreed date, or within a maximum of 45 days if there is an agreed date. Additionally, Section 23 of the MSMED Act, 2006 states that the interest paid to micro, small, and medium enterprises will be disallowed during the computation of income for the calculation of tax.

Understanding Section 43B(h)

The Finance Bill of 2023 has proposed an amendment to Section 43B of the Income Tax Act of 1961. This amendment suggests adding clause (h) in Section 43B, which suggests that any sum payable by the assessee to a micro and small enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed in computing the income of the previous year in which the sum has been paid. This is irrespective of the previous year in which the liability to pay the sum was incurred, as per the accounting method regularly employed.

Applicability of the amendment

It is important to note that the amendment applies only to payments to micro and small enterprises and does not include any payments made to medium enterprises. The difference between micro, small, and medium enterprises is clearly defined in the table above.

This clause is applicable only when the enterprise is buying goods or taking services from the entity registered under the MSMED Act, 2006. It’s important to note that the buyer’s registration under the MSMED Act is not mandatory. Clause 43B comes into effect on April 1, 2023.

Examples of different cases are given below

When there is no agreement between the buyer and seller

Date of invoiceDate of delivery of goodsDue date of payment as per MSMED ActPayment dateDeducted as an allowance in the FYReason
10.03.202410.03.202425.03.202428.03.2024FY 2023-2024If paid after the due date of the MSMED Act, then it will be allowed as a deduction for the year when the payment was made. Here, the payment was made in the same financial year so it was eligible for deduction in the same FY.
10.03.202410.03.202425.03.202402.04.2024FY 2024-2025If paid after the due date of the MSMED Act, then it will be allowed as a deduction for the year when the payment was made. Here, the payment is made in the subsequent FY. Hence, it will be allowed in the next FY.
10.03.202417.03.202401.04.202428.03.2024FY 2023-2024The deduction was allowed in the same FY as the payment was made within the due date
10.03.202417.03.202401.04.202403.02.2024FY 2024-2025If paid after the due date as per the MSMED Act, then it will be allowed as deduction for the year when the payment was made. Here, the payment was made in the next FY so it will be allowed in the next FY.

When there is an agreement between the buyer and seller

Date of invoiceDate of delivery of goodsAgreement  days Due date of payment as per MSMED ActPayment DateDeducted as an allowance in the FYReason
10.03.202410.03.20241525.03.202428.03.2024FY 2023-2024If paid after the due date of the MSMED Act then it will be allowed as a deduction for the year when the payment was made. Here the payment was made in the same FY so it was eligible for deduction in the same FY.
09.02.202409.02.20246025.03.202402.04.2024FY 2024-2025If paid after the due date of the MSMED Act, then it will be allowed as a deduction for the year in which the payment was made. Here, the payment was made in the subsequent FY so it will be allowed in the next FY.
10.03.202417.03.20241501.04.202428.03.2024FY 2023-2024The deduction was allowed in the same FY as the payment was within the due date as per the MSMED Act.
16.02.202416.02.20246001.04.202405.04.2024FY 2024-2025If paid after the due date of the MSMED Act, then it will allowed as a deduction for the year when the payment is made. Here, the payment was made in the next FY so it will be allowed in the next FY.

Requirements to comply with the amendment

Businesses are required to maintain a list of suppliers who belong to micro, small, and medium enterprises and be aware of their MSME registration status to strictly adhere to the payment terms as per the MSMED Act. The categorisation of the suppliers is essential for complying with the requirements of the amendment.

Conclusion

These proposed amendments will ensure timely payments to micro and small enterprises, leading to better working capital management, which in turn helps the organisation grow rapidly and easily expand its operations, which in turn boosts the GDP of the nation.

On the other hand, it causes inconvenience to the buyers as they need to carefully monitor various due dates at the same point in time to calculate the allowance and disallowance as per the Act, which itself is a tedious process and involves higher operational costs.

Therefore, this may discourage buyers from buying from the MSME-registered supplier unless there is a cost-benefit because the bigger suppliers may provide a longer credit period and there are no restrictions on paying them within any due dates.

References

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