Understanding Section 43B | Guide for MSMEs & Businesses

Overview of Section 43B(h) Applicability

Section 43B(h) specifically applies to transactions where goods or services are purchased from an enterprise registered under the MSMED Act, 2006. This provision ensures that MSMEs receive timely payments for their sales.

Defining the Scope: Who’s Covered?

It’s important to note that Section 43B(h) exclusions apply to outstanding dues to traders. The MSMED Act only classifies manufacturers and service providers—not traders—as enterprises for this clause.

Payment Timelines Under MSMED Act, 2006

• For enterprises with a formal agreement: Payments must be made within the earlier of 45 days from the agreement date or the timeline specified in the agreement.
• Without a formal agreement: Payments should be processed within 15 days.

Understanding the Payment Schedule

Here’s a list that illustrates the allowed deduction time frame based on different scenarios:

• 29/03/2024 Transaction:
  • Credit Period: 60 days
  • Actual Payment Date: 25/05/2024
  • Deduction in FY: 2024-25
• 01/04/2024 Transaction:
  • Credit Period: 45 days
  • Actual Payment Date: 21/05/2024
  • Deduction in FY: 2024-25
• Subsequent transactions follow a similar pattern, with deductions aligned with the fiscal year when the actual payment was made.

Consequences of Late Payments

Delays beyond 45/15 days trigger interest charges at three times the bank rate notified by the Reserve Bank of India. This interest is not tax-deductible under the Income Tax Act as stated in Section 23 of the MSMED Act, 2006. Furthermore, if payments are outstanding as of 31st March and the prescribed timelines are not met, expense disallowance will occur under Section 43B(h) for that year, with allowances made in the year the payment is completed.

Retail and Wholesale Trades

The government allows retail and wholesale trade MSMEs to register on the Udyam Registration Portal. Nevertheless, benefits for these entities are limited to Priority Sector Lending.

Small Turnovers and Tax Audits

Enterprises with a turnover of up to 10 crores still fall under Section 43B(h), impacting income computation, despite the absence of a required tax audit.

Filing Under Section 44AD or 44ADA

Businesses filing returns under Section 44AD or 44ADA are exempt from disallowance as these sections take precedence over others in the income range of Section 28 to 43C.

Micro and Small Enterprises Inclusion

This section remains applicable to micro and small enterprises that engage in buying goods or services from other entities of similar standing.

By abiding by these guidelines and deadlines outlined in Section 43B(h), businesses maintain compliance, avoid financial penalties, and support the vitality of MSMEs within the commercial ecosystem.