Delay in making payment to micro, small enterprises means deferred deduction for corporates

Companies not making payment to micro and small enterprises during the current fiscal will have to wait for a year for deductions under the Income Tax Act. The amendment in the law is coming into effect from Assessment Year 2024-25 starting April 1, 2024.

Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 mandates payments to micro and small enterprises within 45 days in case of written agreement and 15 days in case of no-written agreements. There have been numerous instances, when payment was delayed.

In order to resolve this, while announcing Union Budget for Fiscal Year 2023-24, Finance Minister Nirmala Sitharaman said: “To support MSMEs in timely receipt of payments, I propose to allow deduction for expenditure incurred on payments made to them only when payment is actually made.”

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An explanatory memorandum made it clear that this will be applicable for small and medium enterprises only.  Micro enterprises mean a unit where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed Rs 5 crore rupees. For small enterprises, these figures will be ₹10 crore and ₹50 crore, respectively.

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Section 43B of the Income Tax Act provides for certain deductions to be allowed only on actual payment. Further, the proviso allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income. In order to promote timely payments to micro and small enterprises, Finance Act 2023 provided to include payments made to such enterprises within the ambit of section 43B of the Act.

Accordingly, a new clause (h) in section 43B of the Act was inserted to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. However, it is also proposed that the proviso to section 43B of the Act will not apply to such payments.

Maneesh Bawa, Partner with Nangia Andersen India, said the biggest and persistent challenge faced by MSMEs is the collection of payments. It is estimated that value of delayed payments from buyers to MSMEs is ₹10.7 lakh crore annually. Accordingly, “the government, in order to promote timely payments & provide a healthy cash flow to micro and small enterprises, has included such payments under the purview of Section 43B of the Act,” he said.

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According to KT Chandy, Tax Partner, this will only result in timing difference and impact deferred tax adjustments. “Section 43B is in any case a provision dealing with timing difference for tax deduction,” he said.

Amit Maheshwari, Tax Partner with AKM Global, said that actual payment after March 31, which is beyond the above time limit of 15/45 days even if made before the due date of return is to be disallowed unlike other payments referred in section 43B of the Income-tax Act 1961. However, the said payment will be allowed in the next year. “This amendment has cast additional duties and responsibilities upon the taxpayers as well auditors to identify the micro and small enterprises and examine if the payments have actually been made within 15 /45 days as the case may be and if the same is beyond the said limit, then to face disallowance of said payments,” he said.

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