[Opinion] Why Should Govt. Modify the Provision of Disallowance on Delayed Payment to MSEs?

Image

Section 43B of the Income-tax Act lists expenses deductible upon payment, with certain exceptions. The Finance Act 2023 amended Section 43B, allowing deductions for payments to micro and small enterprises (MSEs) beyond the time limit set by the MSMED Act, in the year the payment is actually made.

This article explores a few scenarios illustrating the practical challenges encountered in implementing these provisions, along with recommendations to the government for offering relief.

(1) Payment to supplier along with interest

Query

Buyer entity carrying on business makes delayed payment after balance sheet date (i.e., 31.03.2024) say on 60th day from date of delivery where applicable due date is 45th day but voluntarily includes interest on delayed payment @ 20.25% p.a. for delay of 15 days in the amount of cheque issued to supplier.

Will buyer be spared disallowance of principal amount (amount due for goods purchased) under section 43B(h) and of interest under section 23 of MSMED Act?

Answer

Unfortunately, the answer is no.

Assuming the buyer follows accrual basis of accounting, the principal amount will be disallowed under section 43B(h) for AY 2024-25 though it will be allowed on actual payment basis for AY 2025-26. The interest amount will have to be provided for in accounts for FY 2023-24 and will be disallowed for AY 2024-25 under section 23 of MSMED Act. The disallowance under section 23 of MSMED Act is irreversible and will not be allowed even for FY 2024-25 (AY 2025-26) in which the payment of interest is actually made.

Suggestions

The Central Government needs to take a fresh look at the exorbitant rate of interest under section of MSMED Act, i.e., 3X bank rate which presently works out to 20.25%. Its irreversible disallowance under section 23 of MSMED Act irrespective of status of actual payment of such interest. These provisions were enacted much before Section 43B(h) of the Act.

Now that Section 43B(h) is in place adding life force to Section 15 of MSMED Act, CBDT needs to consider issuing a Circular allowing a delayed payment window of 90-days/120 days from date of delivery/date of removal by MSE Supplier of objection raised in writing by buyer.

It is suggested that if payment is made within this window by buyer voluntarily with interest @ 20.25% for the period of delay from stipulated time limit under section 15 (of 15 days/credit period agreed in writing/45 days) to the date of actual payment within the window, then there should be no disallowance either under Section 43B(h) or under section 23 of MSMED Act.

It is further suggested that in the Union Budget to be presented after the elections, the MSMED Act be amended and rate of interest for delay for delayed payment within the window of 90 days/120 days be reduced to Prime Lending Rate.

If delayed payment not made within the window, then let Section 16, Section 23 and Section 43B(h) operate in full force.

While it is important to strictly enforce provisions regarding delayed payment to MSEs and penalise buyers for delayed payments, it is important not to brutalise the buyer-entities. Sections 16 and 23 of MSMED Act, as they stand presently, together with Section 43B(h), actually brutalise buyer entities. The present regime offers only the big stick for non-compliance and offers no big carrot for voluntary albeit delayed compliance.

Click Here To Read The Full Article