Demystifying MSME Section 43B(h): The 15/45-Day Payment Rule

Introduction:

In India, micro and small enterprises (MSMEs) frequently encounter payment delays, impacting their financial stability. To address this issue, amendments to Section 43B(h) of the Income Tax Act, 1961 have been introduced.

Understanding MSME Section 43B(h):

Section 43B(h) mandates businesses to claim deductions based on actual payments, focusing on payments to Micro and Small Enterprises. Deductions are permitted only when payments adhere to the specified time frame, typically 15/45 days.

Key Provisions:

The amendment necessitates adherence to the time limit set in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, ranging from 15 to 45 days through contractual agreements. Deductions are allowed only upon actual payment by the assessee, effective from April 1, 2024.

MSME Definition:

MSMEs are categorized based on investment and turnover criteria, distinguishing micro and small enterprises.

Key Points:

Applicable Criteria: Only applies to MSME Vendors with turnover below 50 Crores and investment in Plant and Machinery below 10 Crores.

Vendor Registration: Benefits are reserved for UDYAM-registered vendors.

Applicability to Traders: Primarily benefits MSMEs in manufacturing or service sectors.

Treatment of GST: GST portion is excluded as expenditure under Section 43B(h).

Retroactive Consideration: Benefits apply only to post-registration supplies.

Year-End Payments: Outstanding payments at year-end face disallowance if not settled within the stipulated time.

Payment Timing: Timely payments within the financial year are exempt from disallowance.

Conclusion:

The amendments to Section 43B(h) aim to mitigate payment delays for MSMEs, necessitating a thorough understanding for compliance and penalty avoidance. Recognizing the mounting challenges in accounting and compliance, many MSMEs are turning to Chief Financial Officers (CFOs) for effective navigation. Consequently, outsourcing accounting to professionals or regular review by a Virtual CFO has become a prevalent practice among MSMEs.