Provisions under Clause(h) of Section 43B of Income Tax Act
The Finance Act of 2023 brought about a crucial amendment to Section 43B of the Income Tax Act, 1961, with the addition of clause (h) which took effect from April 1, 2024. This amendment aims to guarantee prompt payments to micro and small enterprises, thereby bolstering their financial stability and fostering growth. The provision also serves as a deterrent against delaying payments, which can have detrimental effects on the cash flow of small businesses.
Understanding Section 43B
Section 43B of the Act governs the allowance of certain deductions on an actual payment basis. It specifies that expenses are deductible while calculating income from business or profession based on the previous year in which such expenses are actually paid by the assessee. However, it exempts sums paid by the assessee on or before the due date for furnishing the return of income under section 139(1), provided evidence of payment is furnished at the time of filing the return.
Provisions of Newly Inserted Clause (h) of Section 43B
The newly inserted clause (h) under Section 43B of the Income Tax Act, 1961 states that any sum payable by the assessee to a micro or small enterprise beyond the specified time limit (15 days from acceptance of goods/services) under Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, shall be allowed as a deduction against income from business or profession in the year of actual payment, subject to certain conditions.
Conditions for Disallowance of Expenditure u/s.43B(h)
(i) In case of an Agreement Between Buyer and Seller: Payment must be made within the agreed-upon due date, not exceeding 45 days from the date of acceptance, to claim the deduction. Any delay will result in allowance of deduction in the year of actual payment.
(ii) In other cases: If there’s no agreement, payment to micro or small enterprises after 15 days from acceptance of goods/services shall be disallowed, to be allowed in the year of actual payment. Moreover, If the payment term in agreement exceeds 45 days, Sec. 15 of the MSMED Act applies.
Exclusions from Section 43B(h)
Entities opting for presumptive taxation, MSE suppliers engaged in trading, purchase of capital goods from MSE suppliers other than traders, and trade deposits payable to MSE suppliers are excluded from the purview of this section.
Criteria for Classification of Micro and Small Enterprises
Micro enterprises have a turnover limit of Rs. 5 crores and an investment limit of Rs. 1 crore in plant and machinery or equipment.
Small enterprises have a turnover limit of Rs. 50 crores and an investment limit of Rs. 10 crores.
Conclusion
Section 43B(h) of the Income Tax Act, 1961, is a significant step towards ensuring timely payments to micro and small enterprises, thereby supporting their financial health and contributing to overall economic growth. By understanding and complying with these provisions, businesses can foster a conducive environment for the growth of the MSME sector.
To Download Highlights of the Related Finance Act 2023 CLICK HERE
To Know about the Changes in ITR forms for FY 2023-24 CLICK HERE
Also Read
Income Tax Raid at Encounter Specialist Pradeep Sharma Residence at Mumbai