Section 43B of Income Tax Act in India marks a critical regulation for sustaining the financial health of all businesses and professionals in India. This provision highlights the timing and eligibility of specific deductions which businesses/professionals can claim upon actual payment and not on the basis of accruals. An addition to this Section is Section 43B(h) of Income Tax Act that makes additional provisions for payments to MSEs or Micro and Small Enterprises in India within a stipulated time period. This facilitates cash flow for MSEs and streamlines their tax liabilities, in turn enabling them to find financial stability and funds for business continuity.

Let’s understand the impact on Section 43b (h) on the MSME sector in India and how it reduces delayed payments to MSMEs, facilitates access to working capital funds, and improves MSME payment terms.

What is Section 43b of Income Tax Act?

Section 43B of the Income Tax Act, 1961 refers to specific expenses that are deductible, that a business or professional can claim only when they are actually paid.

This is for calculating income under the PGBP expense tab and not otherwise (Profits and Gains of Business and Profession). Put simply, it means that when a business generates income under PGBP, for the purposes of tax computation, it can be claimed as an expense. It however has some limitations and must be paid in the year itself or before ITR filings.

What’s included in Section 43B: Taxes, cess, fee, bonus, EPF contributions, etc.

We will understand the application of Section 43B of Income Tax Act later.

What is Section 43B(H) of Income Tax Act?

The Finance Act, 2023 introduced the new Section 43B(H) to the Income Tax Act, 1961. This is an addition that aims to reduce cash flow/working capital challenges for micro and small business in India, through timely payment from other businesses.

That is, other businesses (large and medium) buying goods and services from micro and small businesses must pay the amount due within a stipulated timeframe. As per the MSMED Act, 2006 this timeline is set to 45 days.

For any large business to claim expense deductions, the amount due to micro and small businesses therefore must be paid within 45-days of receiving the goods/services. If not, then the sum will be considered as ‘profits’ for the business and taxes/interest will be applicable accordingly.

MSME Section 43B(h)

Section 43B(h) deals with delayed payments and was added to the Finance Act 2023 for the benefit of MSMEs in India. It highlights that deduction claims for any payments made to MSEs for goods or services can be made for the same year if payments are made within the stipulated period (of 45 days), as mentioned in the MSMED Act 2006. This rule is for micro and small businesses only (Medium scale enterprises are not included in the new 45 day payment rule).

In recent news, the government highlighted the necessity for businesses to make payments to MSEs within 45-days for the expenses to be claimed as deductions and not ‘profits.’

Though the initial plan was to put this into effect from 1 April 2024, there has been some concerns and practical challenges to its execution.

What is 43B H analysis?

What does Section 43B(H) of the Income Tax Act mean for MSMEs?

• The provision in the Act helps MSMEs to manage cash flow efficiently
• It ensures their accounting books reflect actual expenses than anticipated ones, demonstrating better financial reporting and fiscal discipline
• It also builds credibility for the MSME as it showcases the business’s adherence to statutory compliances
• It builds trust with the government and employees, facilitates real cash flow, and enables timely collections by the government

But most importantly Section 43B(H) for MSMEs redefined the MSME payment terms to 45 days. This means that any business that owes payments to a MSE business must fulfil it within 45 days of getting the goods or services. Failing to do so will result in the business not being able to claim deductions on the expense, and it will be considered as ‘profits’ for the business.

What is Section 43B H of Income Tax Act for traders?

Does the new MSME 45 days payment rule under Section 43B(h) apply to traders?

In July 2021, the classification of MSMEs was extended to include over 2.5 crores wholesale and retail traders under the MSME category. Traders could now register on Udyam portal as a MSME and avail priority sector lending facilities, as per RBI guidelines.

Traders as MSMEs however can only benefit from availing bank credit under priority sector lending. Hence, the new MSME Section 43B (h) rule of receiving outstanding payments within 45 days does not apply to them entirely. That is:

• For traders doing business with SEs (registered), they will have to pay the MSE within the 45 days payment rule or it will be considered as delayed payments (i.e., they will have to pay compound interest on it)
• However, they may not receive payments from their buyers within 45 days (as they can only benefit from bank credit facility and not the overall benefits of MSME registration, they are not eligible for dues outstanding)

Note: Several traders association bodies are appealing to the courts/government on this matter for resolution.

Which trader comes under MSME?

Retail and wholesale traders can now register themselves on the Udyam portal as a MSME to leverage bank credit facility under priority sector lending. Some of the entities under wholesale and retail trading include:

• NIC codes 45, 46 and 47
• Trade except motor vehicles/motorcycles (check list of non-eligible business activities)
• Repair of motorcycles and motor vehicles

Also read: NIC code for MSME Udyam registration

Examples Section 43B and Section 43B(H) of Income Tax Act

In the previous sections we understood what Section 43B and Section 43B(h) of Income Tax Act implies for businesses, professionals and MSEs. In the next section, let’s have a look at its practical application.

Application of Section 43B of Income Tax Act:

Let us understand this with a practical application of Section 43B of Income Tax Act, 1961 for a business.

Let’s consider a small manufacturing business (Company X) that makes steel utensils. It buys certain raw material, e.g., steel nuts and bolts from a MSE business – Company ABC (i.e., one that has a MSME registration certificate and is registered under the MSMED Act.).

Also understand, for tax computation:

• When Financial Year is 1 April 2022 to 31 March 2023, Assessment Year is 2023-2024
• When Financial Year is 1 April 2023 to 31 March 2024, Assessment Year is 2024-2025

Scenario 1:

Date of payment to Company ABC: 28 June 2023

Company X has to file its ITR for Financial year 2022-23 by 31 July 2023 (ITR-3 non-audit case). Now, since this payment was actually made to the MSE it can be claimed as expenses for the year ending March 2023 (i.e., payment to MSE made in actual before the ITR filing due date)

Scenario: 2

Date of payment to Company ABC: 28 October 2023

In this case, the actual payment to the MSE (i.e., Company XYZ) happened after the due date of ITR filing – i.e. after 31 July 2023. As such, in this case, the expense cannot be claimed for year ending March 2023, but will have to be claimed for year ending March 2024.

Application on Section 43B (H) for MSEs:

In the previous example we understood how deductions can be claimed as expenses under section 43B of Income Tax Act in India. Let us now understand, how the Section 43B(h) impacts MSMEs.

Let’s take the case of Company M that manufactures garments. The company has 100 employees and accrues expenses under EPF or Employee Provident Fund and taxes. As per Section 43B, these expenses cannot be claimed as deductions, unless it is actually paid.

Date of EPF contribution paid: 10 May 2023

Now, if the ITR filings date is 31 July 2023, the EPF contributions paid (e.g., ₹3,50,000) can be claimed as expenses for FYY 2022-23 (that is, year ending March 2023).

This means that for Company M, if the contribution is made after the due dates, then the deduction is shifted to the next year.

Hence, MSME Section 43b(h) encourages businesses to make timely payments for certain expenses to reap its benefits.

Application of Section 43B(h) on Traders:

T is a trader.

• T buys goods from Company M which is a registered MSE
• T also sells to Company L which is a large business

Application of Section 43B(h) for trader:

• T will have to make payments to Company M within 45 days of receiving the goods (since it is a registered MSE)
• T may or may not receive payments from Company L within 45 days of suppling the goods since Section 43B(h) does not apply as a trader/seller

Penalties and consequences of non payment within 45 days?

As mentioned, for delayed payments, compound rate of interest will be applicable.

• 3x compounded bank rate of interest
• Interest payable from date as agreed or date following expiry of timeline

In the past, the government had launched MSME Samadhaan portal as a portal for easing delayed payments to distressed MSME businesses.

In conclusion, though Section 43B(h) of Income Tax Act was introduced to battle the challenges of delayed and deferred payments to MSMEs, there has been unforeseen challenges and concerns that have emerged. The government is looking at the various concerns especially on the application of the rule from 1 April 2024. The idea is to find a suitable solution that benefits all stakeholders involved in the MSE business ecosystem.

*Note: This article is only for information. For business, finance and legal advice please consult a professional.  

Author: Sohini Banerjee

Sohini is a seasoned content writer with 12 years’ experience in developing marketing and business content across multiple formats. At Tata nexarc, she leverages her skills in crafting curated content on the Indian MSME sector, steel procurement, and logistics. In her personal time, she enjoys reading fiction and being up-to-date on trends in digital marketing and the Indian business ecosystem.