Disallowance of Outstanding Payment to MSME- Clear Balance Before 31st March

The Micro, Small, and Medium Enterprises (MSMEs) sector is the backbone of the Indian economy, contributing significantly to employment and GDP. To ensure the timely payment to these enterprises, the government has implemented strict provisions under various laws.

One such provision that demands attention is Section 43B(h) of the Income Tax Act, 1961, introduced via the Finance Act, 2023, which mandates that payments to MSMEs must be cleared within the stipulated time or face disallowance as an expense. With the financial year-end fast approaching, businesses must act swiftly to avoid adverse tax consequences.

Key Provisions Related to MSME Payments

1.Section 15 of the MSMED Act, 2006: As per this section, payments to MSMEs must be made within:

• 45 days if there is no agreement; or

• The agreed timeline (not exceeding 45 days) if there is an agreement between the buyer and the MSME.

2. Section 43B(h) of the Income Tax Act, 1961: This section is introduced in Budget 2023 and effective from FY 2023-24, this section disallows the deduction of any payment to MSMEs unless it is paid on or before the due date specified under Section 15 of the MSMED Act.

Impact of Non-Compliance

The introduction of Section 43B(h) is a significant move to curb delays in payments to MSMEs. For businesses failing to comply, the consequences are as follows:

1. Disallowance of Expense: Payments not cleared within the permissible time frame (45 days or as per agreement) will be disallowed as an expense in the computation of income for that financial year.

2. Tax Implications: The outstanding payment to MSMEs will be added back to the income of the buyer, increasing their tax liability.

3. Reversal of Disallowance: If the payment is made in subsequent financial years, the disallowed amount will be allowed as a deduction in the year of payment.

Steps to Ensure Compliance Before 31st March

To avoid disallowance and penalties, businesses should take the following steps:

1. Identify MSME Suppliers: Verify the MSME status of suppliers using the Udyam Registration Certificate or any other valid MSME registration proof.

2. Review Outstanding Payments: Compile a list of outstanding payments to MSMEs and check the due dates for each.

3. Prioritize Payments: Ensure payments to MSMEs are cleared before 31st March 2025 which are due till 15.03.2025 to claim them as a deductible expense for the financial year 2024-25.

4. Maintain Proper Records: Keep payment records, invoices, and agreements handy in case of any scrutiny by tax authorities.

5. Monitor Compliance Regularly: Set up a system to ensure timely payments to MSMEs to avoid future disallowances under Section 43B(h).

With the financial year-end approaching, it is crucial for businesses to address outstanding payments to MSMEs. Compliance with Section 43B(h) and the MSMED Act not only helps avoid disallowance and increased tax liabilities but also strengthens business relationships with MSME suppliers. The introduction of such stringent provisions underscores the government’s commitment to ensuring financial stability and liquidity for MSMEs.

Businesses must prioritize clearing these dues before 31st March to avoid the tax and compliance pitfalls that come with delayed payments.