As an additional measure to address the challenge of delayed payments faced by MSMEs in the country - A new income tax regulation requiring companies to clear pending bills with MSME units within 45 days comes into effect from AY 2024-25. Not doing so will result in the increase in taxable income and tax for FY 2023-24 as deductions can only be claimed in the year of actual payment.
What is the new tax compliance under section 43B?
The amended tax laws effective April 1, 2024, stipulates that any business entity in India, including companies, proprietorships, partnership firms, or LLPs, must ensure timely payments to registered ‘micro’ or ‘small’ enterprises suppliers. Failure to comply means the entity cannot deduct purchases in the year of acquisition but may only claim deductions in the year of actual payment. Consequently, without these deductions, taxable incomes and business taxes will increase.
Businesses are now concerned about the prospect of incurred expenditures being treated as business income, subject to taxation in AY’25.
India’s mercantile accounting system sees businesses typically book expenditures when they are incurred or accrued, which occurs after the receipt of goods and services, even if the actual payment occurs later. However, under the MSMED Act and section 43B(h) of the Income-tax Act, the time limit for payment to MSME enterprises is 15 days, or a maximum of 45 days if there is a written agreement between the buyer and the seller. Additionally, several other laws have outlined provisions for the timely payment of dues to such enterprises.
Hence, a company that settles outstanding dues (pending over 45 days as of March 31, 2024) and pays the vendor well after April 1, 2024, can claim the purchase as a deduction in the FY 2024-25 accounts but not in FY 2023-24. Limiting the credit period to 45 days in an environment where it typically extends from 90 to 180 days will necessitate a shift in business operations to expedite cash flow. As The Economic Times reports on this issue, the tax compliance may trigger a fundamental change in how money is managed and deals are negotiated in the trade sector in India. In what has become standard practice, master distributors typically receive goods from manufacturing MSME units and subsequently await payments from their customers, often small and medium businesses. This process often leads to delays in the eventual payments made to the MSME unit.
Section 43B (h):
“any sum payable by the assessee to a MICRO or SMALL enterprise beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006.”
Chapter V, MSME Development Act, 2006:
“Liability of buyer to make payment. 15.
“Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day:
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the d2Y of acceptance or the day of deemed acceptance.”
[‘Appointed day’ refers to the day immediately following the expiration of the fifteen-day period from the date of acceptance or the date of deemed acceptance of any goods or services by a buyer from a supplier.] Date from which and rate at which interest is payable.
16. Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, ‘as the case may be; from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank. Recovery of amount due.
17. For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16.”
Challenges faced by MSME suppliers
The government had enacted the law to alleviate the challenges faced by small businesses, which often endure delays of up to roughly six months in receiving payment for goods and services rendered, especially from large buyers. Moreover, while the enforcement of the pertinent regulations varies, penalties can be imposed on specified companies for failing to file MSME-1 due to outstanding payments to MSME suppliers exceeding 45 days (buyers failing to pay MSMEs on time need to submit a half-yearly return to the Ministry of Corporate Affairs stating the amount of payments due and the reasons for the delay).
Suppliers have the option to file delayed payment claims against buyers, but many MSMEs are hesitant due to potential repercussions on future relationships. Given how trade and distribution networks run in India, it becomes very difficult for micro and small businesses to stand up to their large clients, especially if they are dependent on their orders. If the relationship has run afoul, it may have very real financial consequences for the MSME’s ability to be a going concern.
To avoid the implications of the new statute, companies and vendors are exploring various strategies to mitigate its impact, but some approaches may not withstand scrutiny from auditors and tax authorities in the future. These include tacit understanding between the distributor and vendor or direct actions, such as surrendering the MSME (micro, small, and medium enterprise) categorization of suppliers, reclassifying from ‘manufacturing entity’ to ‘trading entity’, not cashing checks before a specified date, or not responding to the company’s registered letter to the supplier asking about their MSME status.
Some vendors are voluntarily waiving their claims on interest for delayed payment by big buyers, per accounting firms speaking to the media. However, this specific approach may face challenges due to provisions in the MSME Development Act, where non-payment to registered MSMEs results in interest payments at triple the central bank rate (according to the MSME Samadhaan, the buyer has to pay compound interest with the monthly rests to the MSME on the amount at 3x of the bank rate notified by the Reserve Bank of India in case the payment is not made within 45/15 days).
Are Retail or Wholesale Traders Covered?
Is the MSME Policy Division clarification dated 01/09/2021 that the benefits to retailers and traders are restricted to Priority Sector Lending only? This Circular is in no way affecting the new law under section 43B(h) of the Income Tax Act. The MSME Circular restricts benefits only to other MSMED Acts. Read the paragraph from the Circular below:
“2. In this context, some MSEFCs have been approached by Traders to get the benefits of provisions of delayed payments as per MSMED Act, 2006 available to MSEs. It is clarified that as mentioned in the aforesaid OM, the benefits to Retail and Wholesale trade MSMEs are restricted upto Priority Sector Lending only, and any other benefits, including provisions of delayed payments as per MSMED Act, 2006, are excluded."
Firstly, the writer of that Circular could not have dreamt of providing a clarification that encompasses a law (section 43B(h) ) which came two years later in 2023 (effective 1 April 2024). Is registration with MSME necessary?
Yes, the MSME recognition is required for the protection under Income Tax Act because it is provided in the Explanation to Section 43B. Although in the context of benefit under the MEMED Act, it has been held in a recent judgment by the Supreme Court in Silpi Industries v Kerala State Road Transport Corporation categorically held that the seller/supplier ought to have registered under the provisions of the Act as on the date of entering into the contract with the buyer for the purpose of taking the benefit of the provisions of the Act.
Importantly, wholesale and retail traders registered with the MSME Ministry’s Udyam registration portal are eligible for only credit benefits from financial institutions under the priority sector lending norms. Hence, clause (h) doesn’t apply to payment delayed to such traders.
For those reasons, we believe that section 43B(h) applies to every person who delays payment beyond the time limit prescribed under section 15 of the MSME Act in relation to anyone recognised as micro-enterprise or small enterprise by the Authorities under MSMED Act. It does not matter they are recognised under the MSMED Act only for restricted purposes. ■
On letter head
Name of the enterprise
Address
PAN
GSTIN
Date: 15-Feb-2024
Subject : Compliance under section 43B(h) of the Income Tax Act, 1961
Dear Valued Vendor,
As part of our ongoing commitment to comply with regulatory requirements and support the growth of Micro, Small, and Medium Enterprises (MSMEs), we are reaching out to all our vendors to update our records in accordance with the MSMED Act, 2006.
We kindly request that you submit your MSME registration certificate, if you are registered as an MSME, within the next 15 days from the date of this mail. This will enable us to provide the necessary support and benefits that are accorded to MSMEs under the relevant regulations and policies.
Please email a copy of your MSME certificate, PAN and ledger to ensure that the documents are legible and the MSME registration number is clearly visible and the updated category is clearly defined in the certificate.
We understand that not all businesses may be registered as MSMEs and this request is only applicable to those who are currently registered under the MSME Act. If we do not receive your MSME certificate within the specified timeframe, it will be deemed that your organization is not registered or not eligible as an MSME.
We appreciate your prompt attention to this matter and your continued partnership. Should you have any questions or require assistance, please feel free to contact.
Thank you for your cooperation and for being a valued part of our business network.
Regards,
For and on behalf of
Name of the business
(Designation)
(On the letterhead of the MSME)
Date:
To,
The Directors/ Partners/
Name of the Business,
Address
PAN:
GST:
Subject : Confirmation of MSME Registration for applicability of Section 43B(h)
Dear Sir,
1. I/ We confirm that my/ our firm maintains MSME / Udyog Aadhaar Registration Number : and PAN: . I/ we also confirm that the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME) are applicable to me/ us and my/ our organization falls under the definition of:
a. [ ] Micro Enterprise
b. [ ] Small Enterprise
I/ We further confirm that my/ our firm registered as:
i. Trader
ii. Manufacturer
iii. Service Provider
2. [ ] None of the provisions of the Act is applicable to us.
3. I/ We further confirm that the credit period agreed under the Micro, Small and Medium Enterprises Development Act, 2006 between the above-mentioned entity and us is _______ days.
4. Without prejudice to other consequences as per the MSMED Act, 2006, CGST Act, 2017 and other laws prevailing in India. As on the present date, your dues as appearing our books are as per the ledger attached.
Authorized Signatory
Name of the person……………………….
Designation…………………………………….
Seal of the firm………………………………
Encl:
1. Copy of Udyam Registration Certificate and PAN
2. Ledger as on date
Note:
1) This confirmation letter has to be printed on letterhead of the confirming enterprise.
2) Enclose a copy of PAN of the confirming enterprise.
3) Please put a Tick in the box [√ ] against the appropriate clause mentioned above.
4) Enclose a self-attested copy of the MSME / Udyog Aadhaar certificate in case clause no 1 is applicable to you.
5) The last date to reply to this confirmation is 15 days from the date of receipt of letter from the customer.
Cut heavy costs of regulatory and tax compliance, make credit available.
Smaller business entities are often associated with the informal sector and widely believed to dodge taxes and bypass tough labour regulations. However, an increasing number of firms engaged in consultancy, research and advisory, and other knowledge intensive services – often with substantial portion of their sales as exports – are part of the country’s formal sector.
Though such firms have fewer employees compared to large firms, they are registered with registrar of companies (RoC) and GSTIN network, and are usually tax compliant. Yet, they are subject to several disadvantages that big businesses don’t have to face and that affect their cost competitiveness and growth prospects. The result is lower investment and loss of thousands of potential jobs.
Nurturing this sub-segment of the formal sector will aid economic growth, improve tax to GDP ratio and create good jobs that the government has been trying to achieve through its formalisation attempts. While demonetisation jolted the informal sector dependent on cash, heavy indebtedness has been troubling large corporations, while the compliance burden is suffocating the smaller business sub-segment of the formal economy.
Reducing compliance burden and associated costs for small businesses is a low hanging fruit that need not be postponed for the future, if we’re serious about achieving our $5 trillion dream by 2024. While low interest rates or low cost credit won’t hurt small business entities, it’s not the ‘cost of credit’ but availability of institutional credit that is hampering their growth prospects. While investors insist on their incorporation as private limited companies, banks don’t like the idea of limited liability set ups.
A large number of firms in this sub-segment deal in services, but the banks’ credit appraisal and disbursal system is more suited to manufacturing firms. Thus, when a newly incorporated consultancy services company approached the country’s second largest public sector bank by market cap for a loan, the bank refused to oblige saying that the value of company’s tangible assets should be at least ten times the loan value. Personal guarantee of the company’s directors with Cibil scores of 800 was no help either. Banks look for ownership of land, factory sites or stock in trade as collaterals that small service companies with few assets may not be able to furnish, and thus are denied bank credit.
Delayed payment from larger private and public sector companies is a common irritant for smaller firms supplying goods and services to them. Many smaller firms do export but our banks have been fleecing them by extracting exorbitant forex conversion charges that could be as much as 3%. No wonder, India’s global export share is so low compared to its size and potential. For getting export incentives, a company small or big must have Import-Export Code (IEC) from DGFT and RCMC (Registration Cum Membership Certificate) from a relevant export promotion council. However, many of our export promotion councils don’t distinguish between large companies and small companies when it comes to their membership charges.
The more complex the regulations and compliance requirements, the greater is the disadvantage small business entities which don’t have dedicated regulatory affairs teams or financial muscle to deal with them. The badly designed and poorly implemented GST regime is a big pain for smaller business entities and that may be the reason why so many of them have been avoiding it for long.
Irrespective of its turnover a small business entity has to file monthly, then quarterly, and if its revenue crosses Rs 2 crore annual GST as well. It has to file quarterly TDS returns. Then there is director’s e-KYC, audit and multiple financial reportings and filings with scary names such as AoC4, ADT1 and MGT7 that overwhelm smaller companies. More rules mean more inspectors to deal with. All these filings and reportings shouldn’t be discouraging small entrepreneurs and professionals from starting their own ventures if we’re serious about expanding the formal economy, good jobs and tax base. So far it seems the major beneficiary of the GST regime are chartered accountants who are getting lots of work to do and make money in the process.
Regulatory experts say our complex rules induce small firms to remain small. It’s compliance burden and not high interest or tax rates that are choking smaller business entities. Hence, the solution doesn’t lie in reducing interest and tax rates or increasing subsidies that mostly benefit large corporates. Second, with banks in general preferring established big companies to lend to, small business entities – especially those in the services sector – are often denied bank credit. Given this backdrop, two things – rationalising regulatory requirements and easy (not necessarily cheap) credit – will help small businesses.
Reducing compliance burden will help small firms save a lot of time and money that could be used for marketing their products and services. To ease access to bank credit, the government should further strengthen its flagship programme, PSB Loan in 59 minutes portal by encouraging private banks to join it or have their own loan portals.
SSC helps manage company tax and compliance across multiple jurisdictions.
