Introduction:
In today's competitive business landscape, it is crucial to support the growth of micro and small enterprises (MSEs). To encourage prompt payments by business enterprises to MSEs, Section 43B(h) was introduced in the Income Tax Act, 1961. This provision outlines the implications for tax deduction and allowance when payments to MSEs are not made within the prescribed timeline. In this article, we will delve into the details of Section 43B(h) and its impact on taxpayers.
Key Provisions:
Section 43B(h) of the Income Tax Act states that any sum payable to a 'micro enterprise' or a 'small enterprise' beyond the specified time outlined in the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) will only be allowed as a tax deduction or allowance in the year in which the payment is actually made. It is important to note that this provision is excluded from the first proviso of Section 43B, which allows deductions for expenses made after the relevant financial year but within the due date of filing the income tax return.
Classification of MSEs:
To determine the classification of MSEs, criteria have been provided by the Ministry of Micro, Small and Medium Enterprises (MSME). A 'micro enterprise' is defined as an enterprise with an investment in plant and machinery or equipment not exceeding INR 10 million and turnover not exceeding INR 50 million. On the other hand, a 'small enterprise' is an enterprise with an investment in plant and machinery or equipment not exceeding INR 100 million and turnover not exceeding INR 500 million.
Payment Timelines:
The payment timelines for MSEs are outlined in Section 15 of the MSMED Act. If payment timelines have been specified in an agreement between the buyer and MSE, the payment should be made within the due date specified in the agreement or within 45 days from the 'day of acceptance,' which refers to the actual delivery of goods or rendering of services. If payment timelines have not been specified, the payment should be made within 15 days from the day of acceptance.
Implications and Exceptions:
Failure to make payments within the specified timelines can have implications for tax deductions and allowances. Payments made within the same financial year or within the specified time will not be subject to disallowance. However, payments made after the specified time may be disallowed, and the amount disallowed in the preceding financial year will be allowed on payment in the subsequent year. It is worth noting that interest on delayed payments under Section 16 of the MSMED Act will also be disallowed.
Capital Expenditure and GST Component:
Section 43B(h) is applicable to payments made to MSEs that are otherwise allowable under the Income Tax Act. However, it is important to understand that capital expenditure is subject to specific provisions of the IT Act, and Section 43B(h) may not be applicable in all cases. Similarly, the treatment of the GST component of payments to MSEs varies depending on whether it is claimed as input credit or charged as expenditure.
Conclusion:
Section 43B(h) of the Income Tax Act plays a crucial role in promoting timely payments to micro and small enterprises. By understanding the provisions and implications of this section, both businesses and MSEs can ensure compliance and support the growth of the MSE sector. It is important for taxpayers to meet the payment timelines specified in the MSMED Act to avoid potential disallowances and optimize their tax deductions and allowances.
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