Section 43B(h) of Income Tax Act introduced in Finance Act, 2023 for protect the interest of micro and small scale business or Enterprises. This Amendment effective from 1st April, 2024 and applies to all assesses. This section introduced by Finance Ministry for Timely payment to small Businesses which is very crucial for economy as well as major Indian businesses fall under this category only.
Table of Contents
Wording from Bare Act: Section 43B(h)
any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006)
To understand whole section and their content we need to identify which business is considered for ” Micro or Small Business ” as per Micro, Small and Medium Enterprises Development Act, 2006. (Now onward we call it MSMED Act.)
Also need to identify what Section 15 of MSMED Act, Say about time limits.
So, Let’s bifurcate and understand whole clause one by one.
Concepts of MSMED Act
What is Micro Enterprise as per MSMED Act ?
As per Section 2(h) of MSMED Act, with amendment dated 01/06/2020 w.e.f. 01/07/2020, Micro Enterprise Where Investment in Plant & Machinery or Equipment does not Exceed 1 Crore Rupees and Turnover Does not Exceed 5 Crore Rupees.
In Short; Max Investment is Rs. 1 Crore and Max Turnover Rs. 5 Crore
What is Small Enterprise as per MSMED Act ?
As per Section 2(m) of MSMED Act, with amendment dated 01/06/2020 w.e.f. 01/07/2020, Small Enterprise Where Investment in Plant & Machinery or Equipment does not Exceed 10 Crore Rupees and Turnover Does not Exceed 50 Crore Rupees.
In Short; Max Investment is Rs. 10 Crore and Max Turnover Rs. 50 Crore
What is Section 15 of MSMED Act ?
Payment for Supplies of Goods or Services done within 45 Days if Both Party agreed for payment terms before such supplies. (More than 45 days payment terms not allowed)
and if no written agreement between buyer and seller parties for payment terms then time limit is 15 Days.
In Short; If Both Parties agreed for Payment Terms then Max time limit for Payment is 45 Days and if no agreement related to payment then 15 days is time limit.
Analysis of section 43B(h)
Condition for Disallowance under this section:
- Supplies of Goods or Services are Micro or Small Enterprise.
- Payment is Due for more than 45 Days if written agreement for payment terms or if no agreement then Due for more than 15 Days from such supplies.
- Payment for such supplies is due beyond 31st March of Such Financial Year.
If above Three Condition is satisfied then amount which is due but not paid will be added to Taxable Income of assessee.
Impact on Taxable Income of Assessee
If Payment not made within Timelimit(15 or 45 Days) then unpaid portion of expense or purchase will be added to Assesssee’s Taxable Income and require to pay huge Tax on it.
If Assessee Pay this amount to Supplier in next Financial Year or Subsequent F.Y. then this Expense allowable in that Financial Year in which actual payment is done.
Important Notes for Section 43B(h) Disallowance
- Expense includes Purchase also.
- Registration of Buyer under MSMED Act, is Not Mandatory.
- If Assessee Calculate Business Income with presumptive Basis as per Section 44AD, 44ADA etc. then section 43B(h) is not applicable because 44AD, 44ADA etc. Section are override the Section 43B(h).
Compliance Keep in Mind for avoid effects of 43B(h)
- For Inward Supplies or Expenses Receive a MSME Disclosures in Tax Invoice or Separate Disclosure in Letter Head of Suppliers.
- Issue Tax Invoice with Proper Mention of Micro or Small Enterprise Category under MSMED Act.
- Trace all Unpaid Expenses or Purchases in March Months and Paid within Due Course (15 Days or 45 Days).
- Make or arrange enough Cashflow at March or April Month.
Section 43B(h) Calculation Excel
You can Download Section 43B(h) Calculation Report Excel Here :-
Section 43B(h) of the Income Tax Act, introduced in the Finance Act of 2023, aims to protect micro and small-scale businesses by requiring timely payment to them. This amendment applies to all assesses and is effective from April 1, 2024. The section states that any payment beyond the specified time limit will be added to the assessee’s taxable income.
The section defines micro and small enterprises based on their investment and turnover. Failure to make timely payments will result in the unpaid portion being added to taxable income, but if payment is made in subsequent years, the expense will be allowed. Businesses need to comply with the requirements of this section to avoid negative impacts on their taxable income, including obtaining MSME disclosures, issuing proper tax invoices, tracking unpaid expenses, and managing cash flow effectively.
Frequently Asked Questions
When did Section 43B(h) of the Income Tax Act, come into effect? and Effective Date of Applicabilty?
Clause (h) of Section 43B was introduced in the Finance Act of 2023 and became effective from April 1, 2024. It aims to safeguard the interests of micro and small-scale businesses by ensuring timely payments.
How does Section 43B(h) impact taxable income for assesses?
If payments to micro or small enterprises are overdue beyond specified limits, the unpaid amount will be added to the assessee’s taxable income, potentially resulting in higher taxes.
What is Criteria for Considering Micro or Small Enterprise?
As per Section 2(h) and 2(m) of the MSMED Act Micro Enterprise’s Max Investment is Rs. 1 Crore & Max Turnover is Rs. 5 Crore and For Small Enterprise’s Max Investment is Rs. 10 Crore & Max Turnover is Rs. 50 Crore.
What does Section 15 of the MSMED Act specify payment timeline?
Section 15 mandates payment for goods or services within 45 days if agreement take place, and if no agreement exists, the limit is 15 days from the supply date.
Is registration under the MSMED Act mandatory for buyers to avoid Section 43B(h) disallowance?
No, registration under the MSMED Act is not mandatory for buyers to avoid disallowance under Section 43B(h).
What are the compliance need to check for avoid the adverse effects of Section 43B(h)?
Steps include obtaining MSME disclosures in tax invoices, issuing proper tax invoices with MSME Category disclose, tracking unpaid expenses, and ensuring sufficient cash flow in March or April.
For Section 43B(h) Expense includes Purchases?
Yes, Expense includes Purchase also for Disallowance u/s 43B(h) of Income Tax Act.
I am File Tax Return presumptive basis u/s 44AD still 43B(h) Disallowance Applicable?
No, because Section 44AD overrides the contrary Provision of Section 28 to 43C. Since, 43B fall within this range So that, 43B(h) Disallowance not applicable.