Understanding Amendment in Section 43B for MSME Presented by CA Naman Maloo

The recent amendment in Section 43B of the Income Tax Act introduces a new clause (h) focusing on payments to Micro and Small Enterprises (MSMEs). Payments to MSMEs must adhere to the time limits prescribed in the MSMED Act of 2006 for deductions to be allowed. This change emphasizes timely payments to MSMEs for claiming deductions effectively. The definition of Micro and Small Enterprises as per the MSMED Act is also provided to aid in understanding the criteria.

• Amendment
• Section 43B
• MSME
• Deductions
• Income Tax

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1. Jaipur Branch of CIRC of ICAI Amendment in Section 43B for MSME Presented by- CA Naman Maloo Prepared by- Pulkit Agarwal Date- 03.02.2024

2. Table of Contents 01 Section 43B of Income Tax Act, 1961 02 Addition of new clause in section 43B Meaning of Micro and small enterprises, and Section 15 of MSMED Act, 2006 03 04 Summary Chart 05 Interest on delayed payment

3. Section 43B Certaindeductions to be only on actual payment

4. Section 43B of Income Tax Act 1. It is a provision that deals with certain expenses that can be claimed as deductions by businesses or professionals while computing their taxable income. These expenses can be claimed as deduction in the year of actual payment only and not in the accrual year. 2. The payment must be made on or before due date of filling return of income of that year to claim deduction on the same year. 3. Section 43B is applicable on every business or profession except businesses or professionals who files their return on presumptive basis. (i.e. 44AD, 44ADA and 44AE) irrespective of whether it s books of accounts are getting audited or not.

5. Addition of new clause in Section 43B 1. The recent amendment in section 43B of Income Tax Act effective from 1st April 2024 and applicable for F.Y 2023-24 introduces a new clause i.e., clause (h) with a specific focus on payment to Micro and Small enterprises. 2. Clause (h) of section 43B of the act specifies that expenses in relation to micro and small enterprises must adhere to the time limit prescribed in section 15 of MSME Act, 2006. Deductions will be allowed only if payments are made as per stipulations of MSME Act, 2006 or in the year of payment if payment is not as per Section 15 of MSME Act. 3. In every clause of section 43B deduction of expense is allowed if it is paid on or before due date of filing income tax return but in clause (h), deduction is allowed only if it is paid as per limits provided in MSME Act, 2006. It shall be further allowed in the F.Y in which it is actually paid.

6. Definition of term Micro and small as per MSME Act, 2006 Small Enterprises Micro Enterprises Investment in Plant & Machinery exceeds 1 crores and, Investment, and Plant & Machinery exceeds 10 crores and, does not does not Meaning of MSME Turnover exceed 5 crores. Turnover exceeds 50 crores. does not does not Turnover above does not include export. For calculating investment in plant and machinery, WDV as per Income tax is considered.

7. Trader registered under MSMED Act Definition of MSME as per MSMED Act As per the MSME Act, only manufacturing unit and service unit are covered. Traders are not covered in the definition of MSME. Further, as per the circular of RBI and various other judgements it was clarified that traders have just been allowed to register for MSME for the limited purpose for allowing credit and covering them under primary lending. Hence, while receiving MSME certificate of any business, you can check if they are registered under NIC 45, 46 and 47 won t be allowed benefit of MSME.

8. Due date for making payment as per MSMED Act, 2006

9. Section 15 of MSME Act, 2006, provides the time frame up to when the payment shall be made by the Buyer to Micro or Small Enterprise supplier- a) On or before the date agreed upon, (agreement of payment in writing is available) Provided that in any case, period agreed upon between the supplier and the buyer in writing shall not exceed 45 days from the day of acceptance or deemed acceptance. Section 15 of MSME Act, 2006 b) Before the appointed day, (where such agreement of payment is not available)

11. Meaning of undersigned terms Day of Acceptance Appointed Day The day of actual delivery of goods or rendering of services OR, As per Clause (b) of Section 2 of MSME ACT, 2006, "appointed day" means the following day immediately after the expiry of the 15 days from the day of acceptance or, the day of deemed acceptance, whichever is earlier of any goods or any services by a buyer from a supplier. In case of any objection is made in writing by the buyer (for acceptance of goods/ services) within 15 days from the day of delivery of goods/ services, then acceptance day shall be the day when the objection is removed by the supplier. in such case,

12. Example of objection from buyer Agreement for credit period does not exist, however objection from buyer exists Date of Order:- 03rd March 2023 Date of Supply:- 05th March 2023 Credit Period :- NIL Appointed day as per above date of supply:- 20th March 2023 Objection due to defective goods by buyer:- 11th March 2023 Removal of objection by seller-: 15th March 2023 (New Date of Acceptance) New Appointed day will be-: 30th March 2023 Therefore, payment to be made on or before-: 29th March 2023

13. Case Supply/ Date of bill received Payment to be made as per MSMED Act 2006 Actual date of payment Consequence If written agreement, payment to be made within 45 days i.e. by 09.05.2024. 1 25.03.2024 28.03.2024 No impact as there would be no outstanding as on 31st March 2024. If no written agreement, payment to be made within 15 days i.e. by 09.04.2024. If written agreement, payment to be made within 45 09.05.2024. No Impact as payment is made by specified time. 2 25.03.2024 30.04.2024 days i.e., by Would be disallowed as payment specified date. If no written agreement, payment to be made within 15 09.04.2024. made after days i.e., by 3 25.03.2024 Written agreement specifies payment within 60 days i.e., 24.05.2024, payment to be made within 45 days i.e., 09.05.2024. 15.05.2024 Would be disallowed as payment made before agreed date but after 45 days.

14. Do the recipient of service needs to be a company or registered under MSME for this provision applicable? to be

15. How can you recognize whether your vendor is registered under MSME or not ? https://udyamregistration.gov.in/Udyam_Verify.aspx

16. Stores purchased during the year which does not form part of Profit & Loss A/c , shall it be covered under the ambit of Section 43B? and spares

17. If in case, the MSME which obtained registration during the mid of the year, will Section 43B apply for whole year transaction?

18. Will the provisions made related to expenses for the business shall be allowed/ disallowed in the profit and loss account?

19. Whether applicable opening 31.03.2023 of creditors? 43B(h) on balance be the of

20. While making disallowance u/s 43B which amount shall be disallowed? Including GST or excluding GST?

21. What if a MSME registered entity is both a manufacturer and a trader?

22. Interest on Delayed Payment The buyer is liable to pay interest on delayed Payment (Principal amount) at a rate three times of the bank rate notified by RBI, compounded with monthly rest. Currently bank rate notified by RBI is 6.75%. So ,the Rate of Interest is 20.25% (i.e., 6.75 * 3) (Source-: RBI.org) Note-: As per Section 23 of MSMED Act, interest paid for delayed payment to MSME is disallowed as an expense in profit & loss A/c, as it is considered penal in nature.

23. Summary 1) Provisions of section 43B is applicable for every entity engaged in business or profession except the entities who opts for presumptive taxation scheme and files their return of income on presumptive basis u/s 44AD, 44ADA and 44AE. 2) Expenses incurred during the course of business covered under the ambit of section 43B of the act shall be allowed on actual payment basis only, and hence accrual concept shall not hold good in the section of the act. 3) Provision on interest shall be mandatory to be made. Interest on delayed payment to MSME is disallowed as per Section 23 of MSMED Act. Hence, it cannot be claimed by the assessee while preparing financial statements. 4) Clause (h) of section 43B of income tax act is applicable only on micro and small enterprises, and not on medium enterprises.

24. Lets discuss on some additional updates!! Higher Rate of TDS under Income tax Act

25. Higher deduction of TDS 1) PAN-Aadhar status: As per section 206AA and 206CCA, the entity should verify the status that whether PAN-Aadhar of all the deductees are linked at the time of deduction of TDS. 2) How to check whether PAN-Aadhar is linked: The procedure to check the status (PAN-Aadhar linked) is detailed at reporting portal of income tax. The link for the portal is- https://report.insight.gov.in 3) If PAN not furnished: If any person has not furnished PAN to person responsible for deducting tax, or/ and PAN-Aadhar of any person/ entity is not linked up to 30th June 2023, then TDS shall be deducted at the rate specified in the provision of section or at 20%, whichever is higher as per section 206AA of the income tax act until the PAN and Aadhar are linked.

26. Section 206AB of the act 1) Any sum payable to a specified person, then the TDS shall be deducted at twice the rate specified in the relevant provisions of law, or at 5%, whichever is higher. 2) Specified Person: Any person who has not furnished the return of income for the A.Y. relevant to the P.Y. immediately preceding the financial year in which tax is required to be deducted, and time limit for furnishing return of income as per section 139(1) is expired, and aggregate of TDS and TCS is Rs. 50,000 or more in said P.Y.

27. Questions/Comments/Suggestions

28. Thank you Naman.maloo@jainshrimal.in https://www.linkedin.com/in/naman-maloo-868245146/

29. Disclaimer We by means of this presentation are not rendering any professional advice, or services whatsoever. We have taken reasonable care to ensure that the information in this presentation is accurate. However we accepts no legal responsibility for any consequential incidents that may arise from errors or omissions contained in this presentation This presentation is based on the information available to us at the time of preparing the same, all of which are subject to changes which may, directly or indirectly impact the information and statements given in this presentation. This presentation has been prepared on the basis of information available in the public domain and is intended for guidance purposes only. This information is not comprehensive and has not been independently verified as to accuracy, or completeness by us. We will not be responsible for any loss however sustained by any person or entity who relies on this presentation. Interested parties are strongly advised to examine their precise requirements for themselves, form their own judgments and seek appropriate professional advice.