The Impact of Delayed Payments on MSME Vendors: Lead to Additional Tax
Government Initiatives for MSMEs: Boosting Liquidity Through Regulatory Changes
In a concerted effort to improve liquidity for MSMEs, the government has introduced several measures. Notably, amendments to the Companies Act in 2013 made it mandatory for companies to annually report outstanding amounts to MSME entities, with provisions for interest on delayed payments. The Finance Bill of 2023 expanded on this initiative by amending Section 43B of the Income Tax Act, impacting payments to MSMEs.
Applicability of Clause (h) of Section 43B of Income tax Act
Section 43B(h) inserted on that if a company withhold money to a Micro & Small Enterprise and pays it late as per provision of MSME. the company can claim expenses on the payment in the year in which actually payment is made. It doesn’t matter when the company was supposed to pay it according to its usual accounting method. Hence Expense Only allow then Company make the Payment to MSMEs.
Payment Timelines for Micro & Small Suppliers:
Enterprises are obligated to pay Micro & Small suppliers within 45 days, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. If there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.
Impact on Taxable Income:
If payments to Micro & Small Enterprises are not made within the specified time frame, then pending amount will be added taxable income for the assessee.The assessee can claim a deduction in the previous year when the payment is made.
Conclusion:
Understanding the nuances of the recent amendment to Section 43B is paramount for businesses engaging with MSME entities. Adhering to payment deadlines and meticulous categorization of suppliers in books are essential measures to avoid disallowances and ensure smooth compliance. As the government continues its efforts to support MSMEs, businesses must stay vigilant and proactive in adapting to these regulatory changes.
