Ensure Timely Payment to Creditors by March: Understanding Section 43B(h)

For businesses operating in India, financial compliance is a crucial aspect that directly impacts tax liabilities and operational efficiency. One of the key provisions introduced under the Income Tax Act is Section 43B(h), which mandates the timely payment of dues to micro and small enterprises. As the financial year draws to a close, it is imperative for businesses to ensure they adhere to this provision to avoid disallowances in tax computation.

What is Section 43B(h)?

Section 43B(h) was introduced through the Finance Act, 2023, and applies specifically to payments due to Micro and Small Enterprises (MSEs) as defined under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. This section states that any amount payable to an MSE for the supply of goods or services will be allowed as a deduction in the computation of taxable income only if the payment is made within the time limits prescribed under the MSMED Act.

Key Compliance Requirements

1. Payment Timeline:

   • If there is a written agreement with the supplier, the payment must be made within the agreed credit period, not exceeding 45 days.

   • If there is no written agreement, the payment must be made within 15 days from the date of acceptance of goods or services.

   • Any delay beyond these timelines will result in disallowance of the expense for tax purposes in that financial year.

2. Impact on Business Tax Liability:

   • If payments to MSEs are not cleared within the prescribed time, the expense will not be allowed as a deduction under Income Tax, leading to a higher taxable income and increased tax liability.

   • The deduction will be permitted in the year in which the actual payment is made.

3. Financial Year-End Considerations:

   • Businesses must prioritize clearing outstanding dues to MSE creditors before 31st March to ensure that these payments are eligible for deduction in the same financial year.

   • Delayed payments will push the deduction to the next financial year, thereby increasing the tax burden for the current year.

     
     

Steps to Ensure Compliance

1. Identify MSE Vendors: Maintain an updated list of vendors registered under the MSMED Act.

2. Track Payment Deadlines: Regularly review pending payments and ensure adherence to the prescribed payment periods.

3. Automate Reminders: Set up internal payment reminder systems to ensure timely payments before the due date.

4. Reconcile Accounts Before March: Conduct a financial review of all outstanding liabilities towards MSEs and clear them before the financial year ends.

5. Maintain Proper Documentation: Keep records of agreements, invoices, and payment proofs to substantiate compliance in case of scrutiny.

   
   

Final Thoughts

Section 43B(h) is a critical compliance requirement that businesses must actively monitor to optimize tax benefits and maintain good relationships with suppliers. With 31st March fast approaching, now is the time to clear all pending dues to MSEs and avoid unnecessary tax disallowances.

For further guidance on tax planning and compliance strategies, feel free to reach out to Infosential LLP. Our team of experts is here to help you navigate regulatory changes and ensure seamless financial management for your business.

Stay compliant. Stay ahead.