Starting April 1, 2024, companies failing to make payments to micro and small enterprises in the current fiscal year will face a delay of one year for tax deductions under the Income Tax Act.
Timely Payments Mandated by MSME Development Act
Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 requires payments to micro and small enterprises within 45 days (with a written agreement) or 15 days (without a written agreement). Despite this, delays in payments have been common.
Budget 2023-24 Proposal for Timely Payments
In response to the payment delays, Finance Minister Nirmala Sitharaman, during the announcement of the Union Budget for Fiscal Year 2023-24, proposed a solution. She suggested that deductions for expenditures on payments to micro and small enterprises will be allowed only when the actual payment is made.
Applicability to Small and Medium Enterprises
This amendment specifically applies to small and medium enterprises. Micro-enterprises are defined as those with an investment not exceeding one crore rupees and a turnover below Rs 5 crore rupees. For small enterprises, these figures are ₹10 crore and ₹50 crore, respectively.
Amendment to Section 43B of the Income Tax Act
To enforce timely payments, the Finance Act 2023 amended Section 43B of the Income Tax Act. A new clause (h) was added, stating that deductions for sums payable to micro or small enterprises beyond the time limit specified in Section 15 of the MSME Development Act 2006 will be allowed only on actual payment.
Estimated Impact on MSMEs
MSMEs often struggle with delayed payments, amounting to an estimated ₹10.7 lakh crore annually. By including such payments under Section 43B, the government aims to promote timely payments and ensure a healthy cash flow for micro and small enterprises.
Perspective from Tax Experts
Maneesh Bawa, a Partner with Nangia Andersen India, highlights the significant challenge MSMEs face in collecting payments. KT Chandy, a Tax Partner, suggests that the amendment may only result in timing differences and deferred tax adjustments. Amit Maheshwari, a Tax Partner with AKM Global, emphasizes the additional responsibilities placed on taxpayers and auditors to identify micro and small enterprises and ensure timely payments within the specified limits. Payments made after March 31, beyond the 15/45-day limit, will be disallowed for the current year but allowed in the subsequent year.
