Section 43B(h) Of Income Tax Act – Timely payments to MSME
Provisions of Section 43B(h) Of Income Tax Act
Section 43B(h) of the Income Tax Act, as inserted by the Finance Act of 2023, addresses the treatment of payments owed to Micro and Small Enterprises (MSMEs) for goods or services provided. Here’s a breakdown of its provisions:
Deduction for Timely Payments: Taxpayers can deduct payments owed to MSMEs within the same fiscal year if they are settled by the deadline specified in the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006.
Effective Date: The amendment is effective from April 1, 2024, applicable for the assessment year 2024–2025 onwards.
Applicability: This provision applies when enterprises purchase goods or services from an enterprise registered under the MSMED Act, 2006.
Time Limit for Payments: As per Section 15 of the MSMED Act, businesses are required to pay MSMEs within 45 days if a written agreement exists. Otherwise, payment should be made within 15 days.
Applicability to Traders: Section 43B(h) is not applicable to dues outstanding to traders as per the MSMED Act’s definition of enterprise. It applies to manufacturing and service providers only.
Penalties for Late Payment: Stringent penalties apply for late payments to MSMEs, with compound interest rates three times the bank rate notified by the RBI.
Benefits:
For MSMEs: Ensures timely cash flow, empowers negotiation power, and reduces disputes.
For Larger Enterprises: Allows tax deductions, promotes compliance, and strengthens the MSME ecosystem.
Expense Allowance: Invoices paid within specific periods are allowable as expenses in the corresponding financial year. If payment is delayed, expenses are allowable in the year of payment.
MSME Registration Verification: MSME registration status can be verified through the official MSME portal by entering the UAM number.
Reporting by LedgerVision Audit tool
LedgerVision audit tool provides a comprehensive report on Section 43B (h) under aging analysis, which is valuable for auditors. This report, downloadable to Excel, offers detailed transaction insights including party name, bill reference number, voucher type, voucher date, original bill amount, payment date, delay in payment, outstanding balance days, and more.
Filtering out payment delays greater than 45 days (Or 15 days as the case may be ) can help identify parties for further scrutiny. However, identifying micro and small enterprises requires consultation with an accountant since LedgerVision can’t determine the vendor status from Tally data alone.
Overall, the Section 43B (h) report streamlines the auditing process, saving time and energy for auditors and enhancing the accuracy of audit reports. LedgerVision Provides report on Sec 43 B (h) under aging analysis window.