Allowable and Disallowable Deductions for MSME under Section 43B(h)
Section 43B was inserted in the Income Tax Act to facilitate small and micro enterprises. The section highlights the need for a 45-day payment, which regulates companies dealing with MSMEs to make the payment in a stipulated timeframe. It aims to boost the credit facility of the emerging enterprises and increase cash flow with better operational efficiency. The 45-day payment rule determines the allowable and disallowable deductions for MSME under section 43B(h). Continue to this post to learn what expenses are claimable as deductions if a business follows the MSME payment rule.
Allowable Deductions for MSME under Section 43B
Deductions will be disallowed if not paid to Micro or small enterprises as per section 2, i.e., either manufacturer or service provider but not wholesale or retail traders.
Investment & turnover limits are to be met.
Any sum payable by the assesse to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small, and Medium Enterprises Development Act 2006 shall be allowed as a deduction only on actual payment.
Thus, the amendment to section 43B of the Act will allow the payment as a deduction only on a payment basis. It can be allowed on an accrual basis only if the payment made is within the time mandated under section 15 of the MSMED Act.
Payment will be allowed as deductions only if it is made before the due date of the ITR. Section 15 of the MSMED act regulates that payment to MSME enterprises should be made within the given timeframe as per the written agreement, which cannot be more than 45 days. If there is no such written agreement between both parties, then the section mandates that the payment be made within 15 days.
The actual payment be made
- Within 15 days if no written agreement/or appointed day (the day following immediately after the expiry of 15 days from the day of acceptance or deemed acceptance)
- Within 45 days if written agreement
The day of acceptance means the day of actual delivery of goods and rendering of services.
The deemed acceptance day means if an objection is raised regarding acceptance of goods or services by the buyer in writing within 15 days of delivery of goods or rendering of services, then the day on which such objection is resolved by the supplier.
Disallowable Deductions for MSME under Section 43B
If the actual payment is not paid within the above-stipulated timeframe, the amount payable to the micro or small enterprise will be disallowable as deductions in that particular financial year. Follow the example- assume written condition of 45 days
Case 1
- Invoice date 25-4-2024
- Time limit as per section 15 of the MSMED Act- 45 Days- 9- up to 6-2024
- Actual payment date= 31-3-2025
Deduction still allowed in FY 2025-26.
Case 2
- Invoice date 25-3-2025
- Time limit as per section 15 of the MSMED Act- 45 Days- up to 9-5-2025
- Actual payment date- 5-5-2025
Deduction still allowed in FY 2025-26.
Case 3
- Invoice date 25-3-2025
- Time limit as per section 15 of the MSMED Act- 45 Days- up to 9-5-2025
- Actual payment date- 15-5-2025
Deduction disallowed in FY 2024-25 and allowed in FY 25-26.
Understanding the details of section 43B and its clauses is crucial to avoid expense disallowance. It enables larger entities to meet legal compliance, and tax professionals come in handy when meeting liabilities is a task. Note that micro or small enterprises defined under section 2 of the MSMED Act 2006 are allowed. Retail and wholesale traders are not allowed as enterprises under section 2 of the MSMED act; therefore, they are kept out of the scope of section 43B. Reach out to TaxDunia to claim the rightful deductions and file your ITR before the due dates.
