Introduction

Section 43B of the Income-tax Act, 1961(the Act), allows certain statutory payments as deduction only on actual payment basis and further as per first proviso to Section 43B of the Act,  if these payments are made on or before the due date of furnishing the return of income under Section 139(1) of the Act as applicable, then the same can be claimed on an accrual basis. 

By way of the Finance Act, 2023 new clause (h) has been inserted in Section 43B of the Act to promote timely payment to Micro and Small Enterprises, wherein any sum payable is outstanding to Micro and small enterprises (creditors) beyond the time limit specified in Section 15 of Micro, Small and Medium Enterprise Development Act 2006 (MSMED Act) then the same will be allowed on actual payment basis in that financial year. Also, it has been specified that proviso to Section 43B of the Act shall not be applicable to such payments. Further CBDT circular 1/2024 dated 23.01.2024 explaining the provision of Finance Act 2023, explains that payment shall be allowed as deduction on accrual basis if payment is made within the time limit mandated under section 15 of MSMED Act. 

The above amendment takes effect from financial year 2023-24.  

Micro and Small Enterprise

Payments only to Micro and Small Enterprises are covered as per Section 43B(h) of the Act which satisfies following conditions as per MSMED Act: 

  • Micro Enterprise – An Enterprise which satisfies two conditions: 
  1. Investment in plant and machinery is less than or equal to INR 1 crore and
  2. Turnover is less than or equal to INR 5 crores    
  • Small Enterprise – An Enterprise which satisfies two conditions: 
  1. Investment in plant and machinery is less than or equal to INR 10 crore and 
  2. Turnover is less than or equal to INR 50 Crores  

Thus, in case the payment is pending to an Enterprise that does not satisfy the above condition, no disallowance shall be triggered. It is advisable to obtain appropriate declarations from the suppliers each year in this regard, as per the category under which they are registered. 

Time Limit for Payment of Invoice

  • If an agreement is made with the supplier, the time limit is the period as per the agreement or 45 days, whichever is earlier. For e.g. If the period as per the agreement is 30 days, then payment should be made within 30 days and if period as per the agreement is 60 days, then payment should be made within 45 days. 
  • If no agreement is made with the supplier, then payment should be made within 15 days  from the date of invoice. 
  • Generally, an invoice mentions that payment must be made within ‘x’ number of days. In such cases, the date shall be the relevant date to determine the due date of payment. 

Amount of Disallowance

The amount to be disallowed will be outstanding amount of the creditor as on 31.03.2024 (amount will be disallowed only if payment is not made within the time limit and is outstanding as on 31.03.2024). Further, if the payment is made in subsequent years, expenses will be allowed in that particular year. In case if payment for the financial year (FY) 2023-24 was made to micro or small enterprise within time limit as per MSMED Act but after 31.03.2024, same will be allowed on accrual basis in the FY 2023-24. Let’s understand the same with examples as below: 

Here’s a Detailed Illustration of the Amendment

Particulars  Scenario 1  Scenario 2  Scenario 3 
Amount of expense  Rs. 18,00,000  Rs. 10,00,000  Rs. 12,00,000 
Date of Invoice   15.08.2023  25.03.2024  16.02.2024 
Due date of payment      
If agreement is of 60 days:  30.09.2023  09.05.2024  01.04.2024 
If there is no agreement:  30.08.2023  09.04.2024  NA 
Date of payment  Rs. 10,00,000(28.01.2024)  Rs. 7,00,000 (09.04.2024)  Rs. 12,00,000 (01.04.2024) 
Rs. 8,00,000 (31.05.2024)  Rs. 3,00,000 (31.05.2024) 
Amount of disallowance       
FY 2023-24 Even though Rs. 10,00,000 is paid after the due date, but it is not outstanding as on 31.03.2024, the same shall be allowed in FY 2023-24. Rs. 8,00,000 will be disallowed as it was outstanding as on 31.03.2024.  Rs. 7,00,000 will be allowed in FY 2023-24 as amount was paid before due date of 15 days as per MSME Act. Rs. 3,00,000 is outstanding as on 31.03.24 and paid beyond the due date of MSME Act and hence required to be disallowed in FY 2023-24.  Rs. 12,00,000 will be allowed in FY 2023-24 on accrual basis as amount was outstanding as on 31.03.2024 but was paid before due date under MSME Act i.e. 01.04.2024 
FY 2024-25 No disallowance and Rs. 8,00,000 will be allowed as deduction in FY 2024-25. Rs. 3,00,000 will be allowed in FY 2024-25, as it was paid beyond the time limit specified  in MSME Act but paid in FY 2024-25 and not outstanding as on 31.03.25.   No effect 


In Scenario 1, even though payment is made before the due date of filing of return for FY  2023-2024, the allowance shall only be made in FY 2024-25, which is unlike other disallowance under 43B where payment is allowed even if made before the due date of filing of return of Income. Thus, in case of payment to these Micro and Small enterprises are concerned under 43B(h), what is relevant is payment being made before the due date as prescribed under MSME Act.
  

Other Key Points

  1. The payment outstanding to any enterprise which is neither micro nor small enterprise, then no disallowance is triggered even though amount is outstanding as on 31st March. 
  2. In case if the payment is not made on account of some dispute, then date when the dispute is settled, from that date, the due date of payment will have to be considered and accordingly disallowance shall be computed. 
  3. Buyer should keep a proof of payment being made within 45 days in the form of payment confirmation voucher to avoid disallowances in IT Act or interest provisions as per MSMED Act. 
  4. Buyer should ensure the supplier sends their MSME registration certificate, if they do not receive the same, the supplier shall be assumed to be non-MSME. Further, the buyer shall have proof of communication with the supplier for non-receipt of registration certificate. 
  5. MSME portal has enabled a new feature wherein the assessee can verify the UDHYAM registration number of the supplier on the portal. 

Interest on Delayed Payment

  • In case of failure to pay within the time limit, levy of interest as per Sec 16 of MSMED Act which is 3 times the bank rate-compounded monthly. (Interest is as per MSMED Act and Income Tax does not levy any interest on delayed payment and further even in MSMED Act it is at the option of the seller to demand the interests from the council.) 
  • No deduction of such interest shall be allowed under the Income Tax Act. 

Conclusion

The Government by way of this amendment, intends to give priority of payment to Micro and Small Enterprise wherein Expenses if they are outstanding as on 31st March will be allowed only if they are paid before the due date of MSMED Act otherwise they will be allowed in the year in which such expenses are paid. This, will lead to timely payments being made to Micro and Small Enterprise. However, the challenge in implementing this provision would be categorization of Creditors which would change from year to year and keeping track of the same would be a challenge and hence declaration from each enterprise would come handy to prove the categorization of creditor under MSMED Act.