New income tax regulation imposes deadline for clearing bills with MSMEs

Hyderabad: Effective from the Assessment Year 2024-25, a fresh income tax regulation mandates companies to settle outstanding bills with Micro, Small, and Medium Enterprises (MSMEs) within 45 days. Failure to comply will lead to increased taxable income and taxes for the Fiscal Year 2023-24, as deductions can only be availed in the year of actual payment.

With the fiscal year-end approaching on March 31, numerous Indian companies have pending payments to small-scale manufacturing vendors, potentially facing higher taxes in the Assessment Year 2024-25. This situation arises due to the introduction of Clause (H) in Section 43B of the Income-tax Act, 1961, by the Finance Act of 2023. Notably, the provision was absent from the 2024 interim budget, signalling no deferment from the government.

The impending tax liability prompts various entities, including master distributors and traders, to reconsider their end-of-fiscal bulk purchases.

According to Section 43B (h), if a company fails to settle dues to an MSME unit within the stipulated 45-day period, the outstanding amount is classified as part of the company's business income for the ongoing financial year, subjecting it to taxation. Delays in payment until the subsequent year translates to increased purchase costs, as deductions cannot be claimed retrospectively.

Speaking about the same an FTCCI official on condition of anonymity said, “MSMEs have not been getting regular payments. To make prompt payments and help MSMEs get their revenue on time, the government introduced Clause (H), Section 43B of the Income Tax Act that was conceptualized on April 1st 2022-23 which came into force or introduced with effect beginning 1st April 2024.”

What does it mean?

To know more about the same the Federation of Telangana Chambers of Commerce and Industry (FTCCI) will conduct a Panel Discussion titled, "Implications & Remedies of Delayed Payments to MSMEs" on Friday, February 16, 2024, from 09:30 AM at FTCCI Surana Auditorium, Federation House, Red Hills, Hyderabad.

MSME entities play a significant role in the Indian economy, with many businesses engaging with them regularly. To encourage timely payments to Micro and Small Enterprises, the Government introduced a new provision, clause (h) of Section 43B of the Income Tax Act, effective from April 1, 2023, through the Finance Act, 2023. This clause mandates that any sum payable to a registered MSME must be settled before the due date specified under Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

There exists confusion within the Trade and Industry sectors regarding the interpretation and application of clause (h) of Section 43B of the Income Tax Act, including how to determine its applicability, procedures in case of default, consequences, and accounting treatment.

To address these uncertainties and provide clarity, FTCCI is organizing this Panel Discussion, which will feature expert insights.

The event anticipates the participation of representatives from MSMEs and other delegates seeking to grasp the applicability and statutory norms of Section 43B (h) of the Income Tax Act.