Introduction [Section 43B(h)]

Section 43B(h) of Income Tax Act, 1961 states that if the buyer(assessee) purchases any goods/ services from a supplier who is registered as a Micro and Small Enterprises under the MSMED Act, 2006 (MEDIUM ENTERPRISES NOT COVERED) AND who is manufacturer/ service providers (TRADERS NOT COVERED), the buyer shall make the payment within the time limit specified in the MSMED Act, 2006. If the payments are not made within the time limit then such expenses shall be disallowed under section 43B(h) of Income Tax Act while computing the business/profession income. It will be allowed in the year in which payment made.

Time Limit

If there is written agreement between the buyer and the seller, then the buyer shall make payment within the time as per the written agreement, which cannot be more than 45 days. In simple language, Agreement date or 45 days from the date of acceptance whichever is earlier.

If there is no agreement between the buyer and the seller, then the payment shall be made within 15 days from the date of acceptance.

Date of Acceptance:

The date of acceptance means the day of actual delivery of goods or rendering of services or

Where any objection is made in writing by the buyer regarding acceptance of the goods or services within 15 days from the day of delivery of goods or rendering of services, the day on which such objection is removed by the supplier.

Examples of how to calculate the time limit

When there is no agreement between the buyer and the seller

Date of Invoice is 01.03.2024

Date of delivery of goods is 19.03.2024. No objection is made by the buyer regarding the acceptance of goods. So, 19.03.2024 will be the date of acceptance.

Payment date is 02.04.2024.

Here, for allowance of deduction in FY 2023-24, the payment is to be made within 15 days of date of acceptance i.e till 02.04.2024. As the payment is made within 15 days so the deduction of this expense will be allowed in FY 2023-24.

In the same example, if the payment is made on 03.04.2024 i.e. after 15 days then the deduction of the expense will be allowed in the year of payment i.e. FY 2024-25.

Where there is agreement between the buyer and the seller of 70 days

Date of  Invoice is 01.01.2024

Date of delivery of goods is 10.01.2024. No objection is made by the buyer regarding the acceptance of goods. So, 10.01.2024 will be the date of acceptance.

Payment date is 20.02.2024

Although there is agreement of 70 days but as per law, payment is to be made within maximum 45 days. Here, payment is made within 45 days from the date of acceptance so the deduction will be allowed in FY 2023-24. Also, if the payment is made after 45 days but before 31.03.2024, then also the deduction will be allowed in FY 2023-24 as the payment is made in FY 2023-24.

But, if the payment is made on 01.04.2024 then the deduction will be allowed in FY 2024-25.

Also, if the agreement between the buyer and the seller is of 30 days i.e. less than 45 days then the time limit will be 30 days and not 45 days.

Interest on payments not made in above time limits

If payments are not made to the seller in above time limit then interest is payable by the buyer @ 3 times the bank rate notified by RBI. Currently the bank rate is 6.75%. Also, this interest is also disallowed under the Income Tax Act, 1961.

To sum up we can say that alongwith disallowance of expenses not paid within the time limits, interest expense( 3 times the bank rate notified by RBI) paid by the buyer for delayed payments will also be disallowed.

Some important points

1. If ITRs filed u/s 44AD/44ADA (presumptive taxation) by the buyer, then the provisions of this section shall not apply.
2. If one Micro or Small enterprise purchases goods/ services from another Micro or Small enterprise, provisions of this section shall apply.
3. For FY 2023-24, make payments till 31.03.2024. If payments are made in FY 2024-25, make sure that the payments are made within the time limits specified (45 days/15days). This will allow buyer to take deduction of such expense in FY 2023-24 itself.
4. Any liability which was already outstanding in respect of the prior period as on 01.04.2023 will not be hit by section 43B(h) even if it is outstanding as on 31.03.2024.
5. Execute agreements mentioning terms of payment so that you can get time limit of 45 days instead of 15 days.
6. Capital expenditure is not covered in this section.
7. If the seller is engaged in both trading and manufacturing/ services, in that situation this section will be applicable to such seller.
8. UAM or EM-II Registration was valid only upto 30-06-2022. These registrations are not valid with effect from 01-07-2022. There is no process of automatically migrating the enterprises from UAM/EM-II to Udyam Registration unless the enterprise files Udyam. Therefore, enterprises with UAM/EM will not be regarded as micro or small enterprises for Section 43B(h) purposes.

What buyer should do to comply with the provisions

1. Collect MSME Certificates (updated Udyam registration certificate) from all the sellers.
2. Prepare a list of sellers with MSME Certificates.
3. If the seller is not registered under MSMED Act (not having certificate) then take written declaration from the seller stating that they are not registered as Micro and Small Enterprises.

What seller (i.e. Micro and Small Enterprises) should do

This amendment was made to ensure the timely payments to micro and small enterprises, safeguarding their liquidity from potential delays in customer payments. It is the responsibility of the seller to intimate it’s MSE registration to the buyer otherwise in the absence of availability of information, no disallowance can be made to the buyer under section 43B(h) . So if the seller is MSE then the seller should specify the MSE registration number on his invoice so that the buyer will get to know about the registration.