Ensuring Timely Payments to MSMEs: The Impact of Section 43B(h)

Starting April 1st, a pivotal change is set to revolutionize the financial dealings between larger corporations and the Micro, Small and Medium Enterprises (MSME) sector in India. A new regulation, aimed at expediting Timely payments to MSMEs, mandates that all dues must be settled within 45 days. Moreover, Failure to comply will not only strain business relationships but also result in a tax liability on the overdue amount.

What is Section 43B(h)?

Introduced by the Finance Act 2023, this amendment to the Income Tax Act adds clause (h) to Section 43B. Its profound impact: If unsettled payments to MSMEs surpass the stipulated period, they will not qualify for tax deductions until payment occurs. The objective is clear: incentivize larger entities to prioritize their financial obligations towards MSMEs, fostering a healthier economic ecosystem for these vital businesses.

Applicability of Section 43B(h)

Section 43B(h) targets transactions involving the purchase of goods or services from enterprises registered under the MSMED Act, 2006. This encompasses a wide range of interactions and emphasizes the importance of prompt payment practices.

Understanding Section 43B(h)

The Income Tax Act’s newly introduced Section 43B(h) ensures timely payments for MSMEs. Here’s what businesses need to know:

• Payment Deadlines: If a business fails to pay an MSME within the specified timeframe, they lose the ability to claim that expense as a deduction from their taxable income. This could lead to an increased tax burden.
• Accrual vs. Payment: Traditionally, Indian businesses record expenses when they occur, following the accrual basis of accounting. However, with the introduction of Section 43B(h), alongside Section 15 of the MSMED Act, 2006, a legal requirement has emerged. Firms must settle dues with MSMEs within 15 days, or up to 45 days if mutually agreed upon.

The Bottom Line

The implementation of Section 43B(h) is a significant step towards protecting the interests of MSMEs and ensuring their financial stability. It’s not just a legal obligation; it’s a moral imperative. By honoring timely settlements, businesses demonstrate respect and support for the backbone of our economy – the MSME sector.

Explore how PTS Systems & Solutions Pvt. Ltd. can assist you in navigating these changes and optimizing your financial processes. Let’s build a stronger, more resilient business landscape together! 💡🤝