Why in News?

To ensure timely payments to the Micro, Small and Medium Enterprises (MSME) sector, a new regulation - Section 43 b (h) of the Income Tax (IT) Act, will be implemented from April 1.

This regulation requires companies to settle their dues with MSMEs within 45 days and non-compliance will lead to a tax liability on the overdue amount.

What’s in Today’s Article?

• What is Section 43B(h) of the IT Act?
• Benefits of Clause (h) of Section 43B
• Concerns Regarding the Implementation of Section 43B(h) of the IT Act

What is Section 43B(h) of the IT Act?

• The Finance Act 2023 introduced an amendment to the IT Act by adding clause (h) to Section 43B.
• This clause stipulates that payments due to UDYAN-registered MSMEs would be allowed as deduction only if the actual payment was made.
  • In simpler terms, if one doesn't pay an MSME on time, they can't deduct that expense from their taxable income, potentially increasing their tax liability.
• Section 43B(h) is applicable to transactions that involve the purchase of goods or services from enterprises registered under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
• Starting from April 1, companies, sole proprietorships, partnerships or LLPs, are required to pay their suppliers registered as MSMEs
  • Within 45 days, if a MSME unit had a written agreement with a medium or large-scale industry for supply of components, spares, or any other product or service.
  • If there was no agreement, the payment should be made within 15 days.
• The aim is to motivate larger entities to prioritise their settlements with MSME counterparts, thereby promoting a more robust economic environment for these smaller businesses.

Benefits of Clause (h) of Section 43B:

• For MSMEs:
  • Smooth Payment Cycle: Section 43B(h) incentivises large companies or entities to settle dues with MSMEs within the specified time frame, which is important for their (MSMEs’) sustainability and growth.
  • Better Bargaining Power: The provision ensures better bargaining power for MSMEs when negotiating payment terms with larger enterprises or entities.
  • Reduced Disputes: Due to timely payments, potential disputes and legal wrangles, which may arise out of outstanding dues are minimised, saving time and resources for both MSMEs and larger businesses alike.
• For Larger Enterprises:
  • Tax Planning: While adhering to the stipulated timelines, larger enterprises or companies can claim deductions for payments provided to MSMEs in the same year, resulting in reduced tax liabilities.
  • Compliance and Transparency: IT Section 43B(h) promotes transparent financial practices and regulation adherence, promoting a responsible business environment.
  • Strong MSME Ecosystem: Ensuring prompt payments to MSMEs incentivises a robust MSME ecosystem, benefiting larger entities through a vibrant supply chain and ease of access to various resources.

Concerns Regarding the Implementation of Section 43B(h) of the IT Act:

• Traders' body (CAIT) have appealed to the Finance Minister for a deferral of the clause until April 2025, citing a lack of clarity on the law's applicability.
• The retail industry typically operates on a credit day cycle of 90-120 days for payments, which can sometimes extend to 180 days.
  • It is common for even well-regarded retailers to adhere to this timeframe for settling payments.
  • Therefore, the expectation for retailers to instantly adjust their business models to comply with a 45-day payment cycle is highly unrealistic.
• The new rule has led retailers to cancel orders with MSMEs in favour of non-MSME players.
  • As a result, MSME apparel manufacturers are anticipated to incur losses of Rs 5,000-7,000 crore in the January-March quarter due to the amendment.
  • This means the intervention is also hurting a section of the industry.
• Additionally, a significant number of retailers are considering returning unsold merchandise to the manufacturers, thus relieving themselves of the payment obligation.