Promoting timely payments to Micro and Small Enterprises
Hon’ble Finance Minister Nirmala Sitharaman, In order to promote timely payments to micro and small enterprises, proposed new clause (h) in section 43B of the Income-tax Act, 1961, in the Union Budget 2023-24, which talks about certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on an accrual basis, if the amount is paid by due date of furnishing of the return of income.
Accordingly, with effect from 1st April 2023, any sum payable by the assessee (Buyer) to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.
Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, the proposed amendment to section 43B of the Act will allow the payment as a deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
DEFINITION / CLASSIFICATION OF MICRO AND SMALL ENTERPRISE
| Classification | Micro | Small | Medium* |
| Manufacturing Enterprises and Enterprises rendering Services | Investment in Plant and Machinery or Equipment: Not more than Rs.1 crore and Annual Turnover ; not more than Rs. 5 crore | Investment in Plant and Machinery or Equipment: Not more than Rs.10 crore and Annual Turnover ; not more than Rs. 50 crore | Investment in Plant and Machinery or Equipment: Not more than Rs.50 crore and Annual Turnover ; not more than Rs. 250 crore |
APPLICABILITY
This amendment will take effect from 1st April 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years. It means w.e.f. F.Y. 2023-24 – 1st April 2023.
EXAMPLES
Example I: Written Agreement having 45 Days time limit
| Date of Transaction | 16th March 2024 |
| Due Date of Payment as per Agreement (Max. 45 Days) | 30th April 2024 |
| Books of Accounts closed on | 31st March 2024 |
In this scenario, the due date of payment falls after the year’s end i.e. 31st March 2024 and as per the proposed clause, “deduction can be allowed on an accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act”. In our example, which is 30th April 2024. Therefore, in this case deduction is allowed on an accrual basis also.
Example II: No Written Agreement i.e. 15 Days time allowed for payment
| Date of Transaction | 16th March 2024 |
| Due Date of Payment in absence of Agreement (15 Days) | 31st March 2024 |
| Books of Accounts closed on | 31st March 2024 |
In this scenario, the last date to clear the dues is 31st March 2024. If an assessee makes the payment till 31st March 2024 which is by default the last day of the Financial Year also, then only the deduction is allowed. If payment is made on 1st April 2024 then the such expense would be disallowed for F.Y. 2023-24. Therefore, if you will not make the payment by 31st March 2024 and such expense will not allowed as a deduction for that year then technically you will have a complete year to make the payment, as a deduction is allowed on payment basis so you can make the payment till 31st March 2025 to claim the expense for the F.Y. 2024-25.
Example III: Transaction during the year with or without Agreement
| Date of Transaction | 16th May 2023 |
| Due Date of Payment in absence of Agreement (15 Days) | 31st May 2023 |
| Due Date of Payment having Agreement (Max. 45 Days) | 30th June 2023 |
| Books of Accounts closed on | 31st March 2024 |
In this scenario, if payment is made within due time or not, but on or before 31st March 2024, then expenses are allowed as a deduction on payment basis.
CRUX
From the above 3 Examples, it can be concluded that the provision of the proposed clause (h) of Section 43B of the Income-tac Act, 1961 is more effective for year-end transactions but in any case, it cannot be denied that the assessee has to make the payment within the year or not more than 45 days if transactions occurred at year-end.
Read More on Union Budget 2023-24
