Summary of Intersection between Section 43B(h) of Income Tax Act and MSMED Act, 2006

Summary: Intersection between Section 43B(h) of Income Tax Act and MSMED Act, 2006

Table

No	Topic	Summary
1	Introduction	The Finance Act, 2023, introduces changes with the insertion of clause h in section 43B of the Income Tax Act, enhancing MSME payment regulations. This analysis explores its implications for small businesses, focusing on the Income Tax Act, 1961, and the MSMED Act, 2006. Section 43B(h) disallows expenses for payments not made within specified time limits, bolstering enforcement for MSME payments. Definitions of MSMEs and payment periods are discussed.
2	Definition of MSMEs	MSMEs are classified based on investment in plant/machinery and turnover. Micro: ≤₹1 crore investment, ≤₹5 crore turnover; Small: ≤₹10 crore investment, ≤₹50 crore turnover; Medium: ≤₹50 crore investment, ≤₹250 crore turnover. This classification came into effect from July 1, 2020.
3	Payment period	Buyers must pay suppliers within agreed-upon timeframes or within 45 days if no agreement exists. Interest is payable at 3 times the bank rate if payment is delayed. Buyers subject to audit must furnish dues to MSMEs. Interest paid or payable is not allowed as expenditure under Section 23 of the MSMED Act, 2006.
4	Disallowance under 43B(h)	Expenses unpaid beyond specified time limits are disallowed under section 43B(h) of the Income Tax Act. Interest is applicable on delayed payments. Disallowance and interest are not allowed as expenditure.
5	Traders under Section 43B(h)	Only manufacturers and service providers are covered by Section 43B(h) of the Income Tax Act. Retail and wholesale trades are included as MSMEs but with restricted benefits.
6	Disallowance under 40(a)(ia)	If TDS is not deducted and payment is not made within time limits, disallowance occurs under section 43B(h) rather than 40(a)(ia). This is because no deduction is claimed.
7	Applicability under Section 44AD	Section 43B(h) does not apply to businesses filing returns under Section 44AD or 44ADA, as these sections override Sections 28 to 43C.
8	Applicability under No Tax Audit	Section 43B(h) is applicable regardless of turnover, affecting income computation.
9	Application to Micro/Small Ent	Micro and small enterprises must comply with payment conditions even when purchasing from other MSMEs.
10	Recommendations	Collect MSME certificates from vendors, maintain a list of certified vendors, issue agreements or purchase orders with payment terms, ensure timely payments, and mention MSME Udyog Aadhar number on invoices.
11	Conclusion	The integration of section 43B(h) of the Income Tax Act and the MSMED Act, 2006, establishes strict MSME payment regulations. Businesses must adhere to payment periods and interest provisions to ensure compliance. This analysis serves as a guide for businesses to understand and implement these regulations, securing their financial practices and relationships with MSME vendors.

FAQs

No	Question	Answer
1	What is the significance of Section 43B(h) of the Income Tax Act?	Section 43B(h) disallows expenses for payments not made within specified time limits to MSMEs, enhancing enforcement of MSME payment regulations.
2	How are MSMEs classified?	MSMEs are classified based on investment in plant/machinery and turnover. Micro, small, and medium enterprises have different investment and turnover criteria.
3	What are the payment periods according to the MSMED Act?	Buyers must pay suppliers within agreed-upon timeframes or within 45 days if no agreement exists. Interest is payable at 3 times the bank rate if payment is delayed.
4	Is Section 43B(h) applicable to all businesses?	No, Section 43B(h) applies only to manufacturers and service providers. Retail and wholesale trades are included as MSMEs but with restricted benefits.
5	What are the recommendations for businesses regarding MSME payments?	Businesses should collect MSME certificates from vendors, maintain a list of certified vendors, ensure timely payments, and mention MSME Udyog Aadhar number on invoices.