Section 43B(h) of the Income Tax Act, introduced by the Finance Act 2023, aims to ensure timely payments to micro and small enterprises (MSEs). Let's understand its applicability, date of effect, limit, and implications.
Applicability
This section applies to any sum payable by an assessee (taxpayer) to a micro or small enterprise. It does not apply to medium enterprises.
Date of Effect
Section 43B(h) is effective from April 1, 2024, applicable to the assessment year 2024-25 onwards.
Time Limit for Payment
The time limit for payment to claim tax deduction under this section is as specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. This typically translates to 45 days from the date of acceptance of goods or services by the buyer.
Implications of Late Payment
If the payment to an MSE is not made within the specified time limit, the assessee cannot claim the expense as a deduction in the year it accrues. The deduction can only be claimed in the year the payment is actually made to the MSE.
Example
Company A purchases goods worth Rs. 1 lakh from a micro enterprise on January 1, 2024. As per MSMED Act, the due date for payment is February 15, 2024. If Company A fails to make the payment by February 15, it cannot claim the Rs. 1 lakh expense as a deduction for the financial year 2023-24. The deduction can only be claimed in the financial year when the payment is actually made to the micro enterprise.
In Conclusion
Section 43B(h) promotes timely payments to MSEs, improving their cash flow and working capital. Businesses should ensure they adhere to the stipulated timelines for payments to claim tax deductions and avoid any implications.