Details

We would like to bring to your attention an important update regarding the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006 and its implications on payments made to micro and small enterprises.

Specifically, payments made to micro and small enterprises are now included in the ambit of sec.43B to encourage timely payments to micro and small enterprises.

MSME definition:

Here is a simplified overview of the changes:

Time Limit for Payments to MSMEs: Section 15 of the MSMED Act mandates that payments to micro and small enterprises should be made within the time specified in the written agreement (not exceeding 45 days). If no written agreement exists, the payment must be made within 15 days. This timeframe is harsh on the businesses not registered under MSMED Act.

Interest on delayed payments to MSMEs: Where the payment has not been made to MSME registered entity being micro and small enterprise, then interest is payable at rate upto 3 times of RBI notified bank rate (currently RBI notified bank rate is 6.75%).

Deductions Only on Actual Payment Basis: The recent amendment to Section 43B specifies that any sum payable to a micro or small enterprise beyond the time limit as mentioned above will be allowed as a deduction only when the actual payment is made. This means that businesses purchasing goods/services from businesses registered under MSMED Act need to ensure prompt payment to avail the deduction of the expense.

Important Note: The proviso to Section 43B, states that expenses shall be allowed as deductions if the amount is paid by the due date of filing the income tax return. But this proviso does not apply to payments made to micro and small enterprises as per the new clause (h). Also, this provision of delayed payment is applicable only to payments being made to micro and small enterprises only and not to medium enterprises.

Effective Date: The amendment is effective from April 1, 2024, and will be applicable for the assessment year 2024-25 and subsequent years that is while filing your ITR for FY 2023-24, if payment to micro and small enterprises is not made within the time limit specified then it shall not be allowed as deduction in FY 2023-24 rather the expense shall be allowed as deduction in the financial year in which it is paid.

In essence, this amendment aims to promote timely payments to micro and small enterprises, aligning with the government's commitment to supporting and nurturing these businesses.

If you have any questions or require further clarification, do not hesitate to reach out to us.

Thank you for your attention to this matter.

Regards,

CA Ronak A. Gandhi