IMPACT OF LATE PAYMENT TO MSME VENDORS -

A CRITICAL ANALYSIS OF SECTION 43B(h) OF THE INCOME-TAX ACT, 1961

Introduction

The Government vide Finance Act, 2023 introduced clause 'h' to section 43B of the Income-tax Act, 1961 ('the Ac') to the statute books with an intent to protect the interest and mitigate the hardships of the micro and small size enterprises (MSE) from default in payment of their dues. The insertion of newly inserted clause 'h' to section 43B of the Act would mean that the deduction with respect to any sum payable by the Assessee to any MSE beyond the time limit specified in section 15 of the Micro Small and Medium Enterprises Development Act, 2006 (MSME Act) would be allowed only on payment basis.

Therefore, understanding of the definition of MSE, provisions of section 43B(h) under various scenarios that may call for disallowance, and provisions of section 15 of the MSME Act therefore acquire relevance for a better understanding of the tax consequences

Who qualify to be a micro or a small enterprise?

Notification no. S.O. 2119 (E) dated 26.06.2020 , section 2(h) and 2(m) r.w. section 7 of the MSME Act prescribes the following criteria for micro or small enterprise which must be cumulatively satisfied -

It is clarified by Explanation 1 to the 7(1) of MSME Act that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

Apart from the above, the enterprise meeting such criteria must have obtained an Udyam registration from a competent authority under the provisions of section 2(n) r.w.s 8 of the MSME Act to be eligible for recognition as a MSE.

Therefore, in absence of such registration, applicability of provisions of section 43B(h) may not arise to payments due to such vendors.

1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx
2. https://dcmsme.gov.in/State-Gov/Notification_%20S%20O%202119.pdf

Position of payment made to medium enterprises

Your attention may be invited that the word 'medium enterprise is missing' from the provisions of section 43B(h) and section 15, therefore suggesting that sums payable to medium enterprises do not get covered under the sweep of section 43B(h) of the Act.

Position of payment made to pure traders

Furthermore, section 2(e) of the MSME Act defines an enterprise to be industrial undertaking or business or any other mode of establishment which is engaged in the manufacture or production of goods pertaining to industry mentioned in the First Schedule of the Industries development and regulations Act, 1951 or engaged in providing or rendering of any services.

Further, The Central Government , vide office memorandum(O.M) issued on 2-7-2021 , has allowed the TRADERS to get registration for UDYAM under the NIC Code 45,46 and 47 but for limited purposes. In that O. M. it is specifically stated that benefit to retail and wholesale trader MSME shall be restricted only for Priority Sector Lending.

Accordingly, one may consider that payment made to pure traders of goods do not get covered by the provisions of section 43B(h) of the Act though they would have acquired a UDYAM registration for banking purposes.

Summary of the above provisions for applicablity

Provisions of section 15 of the MSME Act

Chapter- V, section 15 of the MSME Act provides that the payments to micro or small enterprises must be made as per the agreement or the appointed day. However, in no case such credit period whether agreed or otherwise may exceed 45 days from the date of acceptance/ deemed acceptance.

Appointed day- Day immediately following the expiry of 15 days from the date of acceptance. (section 2(h) of the MSME Act.)

1. https://www.dcmsme.gov.in/scan0052.pdf
2. https://samadhaan.msme.gov.in/WriteReadData/DocumentFile/MSMED2006act.pdf

Date of acceptance - date of actual delivery of goods or service, or where there has been an objection with respect to acceptance of delivery, date of removal of such objection by the supplier.

Date of deemed acceptance - where no objections are filed by the buyer within 15 days of delivery of good/ services, the date of delivery of good/ services would be deemed to be the date of acceptance

Therefore it may be noted that where there is no agreement, the time limit allowed for making the payment due is 15 days from the date of acceptance also called as Appointed day.In case of an agreement, if the agreement prescribes a shorter duration or a duration which is less than 45 days, then the date as prescribed in the agreement. Where the agreement provides for a credit period longer than 45 days, then the credit period would be restricted to 45 days and the payment would accordingly fall due on the 46th day.

Position of applicability of section 43B(h) of the Act under various scenarios

How to verify whether the Vendor is a MSE's supplier?

Usually, after the amendment, the suppliers include their MSE registration number on the invoice or alternatively acquire a declaration or copy of certificate from the vendor. Further, the buyers can verify the registration and the type of enterprise (Micro/ Small/ Medium) using the registration number from the MSME portal.

What if the Supplier does not intimate the MSE registration to the Buyer?

The buyer may ask for the details of registration in discharge of his responsibility in good faith. However, it is the duty of the supplier to intimate the fact of his registration as an MSE to the buyer. If the supplier fails to intimate the details and fact of his registration as an MSE, the buyer cannot be expected to be bound by the provisions of section 43B(h).

Position where the supplier is both a supplier and trader?

In such cases, a position may be taken to make 43B(h) apply only to supplies. However, as a matter of abundance caution, one may comply with making such payments to the supplier both in respect of trading and supply activity within the stipulated time in case the expenses include a mix of both.

Position of provisions created for various expenses

Usually, following the accrual concept principle, the Assessee's usually create provision for expenses on the last date of the Accounting year for various service such as audit fee, legal fee etc. In such a scenario, the provisions of section 43B(h) may not apply as provisions of section 15 of the Act, require the Assessee to make payment to the micro or small enterprise within 15 days from the delivery of goods/ provisioning of services. Therefore, one may say that as on the date of creation of such provision, the time limit for payment has not lapsed and therefore provisions of section 43B(h) do not apply.

Whether the provisions apply to unpaid GST?

Input GST is usually claimed as an ITC and therefore not debited/ charged to the profit and account. Hence the question of applicability of 43B(h) of the Act in such scenario would not arise.

However, in case of ineligible ITC or blocked credit, the same is charged to P&L account as an expense. Since the buyer has the liability to pay the same to the supplier in discharge of the invoice raised, it may be argued that such ineligible ITC would be allowed to be debited only on actual payment basis.