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 payments to MSMEs, mandates that all dues must be settled within 45 days. And, 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, an amendment to the Income Tax Act has been made with the addition of clause (h) to Section 43B. This clause is a game-changer for MSMEs as it ensures that any unsettled payments owed to them, if not resolved within the stipulated 45-day period, will not be eligible for tax deductions until the payment is made. So, The objective is clear: to 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 newly introduced Section 43B(h) of the Income Tax Act is designed to ensure that MSMEs receive their payments in a timely manner. 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, there is now a legal requirement to 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 is a reminder for all businesses to re-evaluate their payment processes and align them with the new legal framework. So, Timely settlements are not just a legal obligation but a moral one, reflecting the respect and support for the backbone of our economy – the MSME sector.