Final Reminder: Complete Your Section 43B(h) Compliance Before March 31, 2025

A Crucial Change in Income Tax for Payments to MSMEs

The Indian government has introduced a significant amendment to the Income Tax Act through the Finance Act 2023, specifically Section 43B(h), to support Micro, Small, and Medium Enterprises (MSMEs). This provision mandates timely payments to MSMEs for businesses to claim tax deductions. With the March 31, 2025 deadline approaching, businesses must understand and comply with this new regulation to avoid financial and compliance-related challenges.

What is Section 43B(h)?

Section 43B(h) focuses on the timing of payments made to Micro and Small Enterprises. It states that if a business fails to make payments to MSMEs within the time limit prescribed under Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the expenditure will not be allowed as a deduction in the same financial year.

This provision aims to ensure timely payments to MSMEs, which often face cash flow challenges due to delayed payments from buyers.

Understanding the MSMED Act, 2006 and Section 15

To fully grasp the implications of Section 43B(h), it is essential to understand Section 15 of the MSMED Act, 2006, which outlines the time limits for payments to MSMEs:

Written Agreement:

• If there is a written agreement between the buyer and the MSME supplier, the payment must be made within the agreed-upon period.
• However, this period cannot exceed 45 days from the date of acceptance or the deemed date of acceptance.

No Written Agreement:

• In the absence of a written agreement, the payment must be made within 15 days from the date of acceptance or the deemed date of acceptance.

Key Implications for Businesses

Impact on Tax Deductions:

• Businesses that fail to make timely payments to MSMEs will lose the tax deduction for such expenses. This will directly increase their taxable income and overall tax liability.

Cash Flow Management:

• Businesses must ensure efficient cash flow management to meet the payment deadlines. This may require revisiting payment cycles and implementing robust tracking mechanisms.

Importance of Written Agreements:

• Clear written agreements with MSME suppliers are crucial. These agreements not only define payment timelines but also serve as documentary evidence in case of disputes.

Focus on MSME Categorization:

• Businesses must accurately identify their suppliers as Micro or Small Enterprises by verifying their Udyam Registration Certificate.

Steps to Ensure Compliance Before March 31, 2025

Identify MSME Suppliers:

• Review your supplier database and identify all Micro and Small Enterprises. Verify their MSME status using their Udyam Registration Certificate.

Review Payment Terms:

• Examine existing contracts and payment terms with MSME suppliers. Ensure they align with the time limits prescribed under the MSMED Act, 2006.

Establish Clear Payment Processes:

• Implement robust payment processes to ensure timely payments within the stipulated time limits.

Maintain Proper Documentation:

• Keep detailed records of all transactions with MSME suppliers, including invoices, payment receipts, and written agreements.

Seek Professional Advice:

• Consult with a tax advisor or Chartered Accountant (CA) to understand the specific implications of Section 43B(h) for your business and ensure compliance.

Consequences of Non-Compliance

Failure to comply with Section 43B(h) can lead to:

• Loss of tax deductions, increasing taxable income and tax liability.
• Potential scrutiny from tax authorities.
• Financial strain due to increased tax burden.

Conclusion

Section 43B(h) is a significant step toward promoting timely payments to MSMEs and fostering a healthy business ecosystem. Businesses must proactively understand the implications of this provision and take necessary steps to ensure compliance before the March 31, 2025 deadline. By prioritizing timely payments and maintaining proper documentation, businesses can avoid adverse impacts on their tax liabilities and contribute to the growth of the MSME sector.

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