[Opinion] Challenging time ahead for Indian Inc. to comply with payment terms with MSME

Authored by Deepak Kakkar | FCA, DIIT(ICAI)

Table of Contents

1. Section 43B of the Income Tax Act

2. Existing norms related to the payment to MSME enterprises

3. Due dates of payment as per MSMED Act

4. Impact of the proposed amendment

Finance Minister Smt. Nirmala Sitharaman has assigned a big task to Indian Inc. by modifying the rules related to deduction of expenses when they deal with Micro and small entities (MSE).

In her budget Speech, she 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”.

But the finance bill has proposed to tweak the Section 43B by including payment to Micro or small enterprises but linking the due dates as mentioned in Micro, small and Medium Enterprises Development Act, 2006, meaning thereby even if the payment is made within the financial year or before the due date of filing Tax return, still the deduction will be denied if not paid within the time prescribed as per MSMED Act.

1. Section 43B of the Income Tax Act

Section 43B which is a special provision of the Income-tax Act which specifies certain expenses are deductible only on a payment basis whereas generally accounting principle allows expenses on an accrual basis.

This section was introduced by the Finance Act, 1983 with only two clauses mentioned in it. Over a period of time, it gets extended by adding various types of payments or expenses under its ambit making it total to eight types of payments or expenses before the Finance bill 2023.

Govt. adds any payment within the preview of this section when it considers it as a preferred payment that should not be delayed.

2. Existing norms related to the payment to MSME enterprises

Existing provisions of the Income Tax Act mandate the assessee to disallow the Interest paid/payable on payment to MSE beyond the due dates. Companies Act also mandates the Companies to disclose the balance outstanding and interest thereon due to MSE entities as a separate disclosure in the financial statements. GST provisions mandate payment to vendors of any supply, whether MSME or not, within 180 days failing which credit needs to be reversed. At the same time, the new Income Tax provision will certainly require a more robust mechanism in dealing with these entities.

3. Due dates of payment as per MSMED Act

Section 15 of the MSMED Act deals with the liability of a buyer to make payment. It states that the buyer must pay to MSE vendor within 15 days of delivery of goods or provision of services in the absence of a written agreement to this effect.

And, even if there is a written agreement related to payment terms between the parties, it can not stipulate a payment term in excess of 45 days. So practically, even if two parties in a transaction are ready to continue on any payment term in excess of 45 days, the law mandates to pay within 45 days only.

4. Impact of the proposed amendment

And now, Income Tax Act proposes to deny the deduction of expenditure or purchase if payment is made after these dates. In the recovery phase from Covid-19 and war impact, proposing this kind of change may go against the theme of Ease of doing Business. Also, for any aggrieved seller of the goods or services, a robust system of the samadhaan portal to register their grievance is available.

Another key change is to disregard the payment made to MSE suppliers even if made before the due date of filing ITR, which is generally considered and allowed in other cases of section 43B of the Act.

So, practically, the law mandates the payment within the year of incurring the expense or purchase, etc.

As per the language used in the finance bill, it seems that only the payment outstanding as on 31^st March will face disallowance if the time period lapsed as per MSME Act, another interpretation also suggests that any payment, which is actually made to MSE during the year but beyond the prescribed due dates will not be allowed whatsoever. The industry’s concerns are also about the applicability of the new clause on year-end provisions made to comply with the concept of accrual. Though, new provision of disallowance should not cover these expenses.

Anomaly coming out of the proposed provision

A clarification on these aspects through a circular may be provided by the department or the final provision may be modified to answer all the concerns when the Act is passed.

Dive Deeper:
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