How the New Income Tax Section 43 B(H) Changes Your MSME Suppliers

Got a mountain of unpaid bills from your smaller suppliers? Section 43B(h) of the Income Tax Act is shaking things up, meaning delays in settling those MSME bills can now hurt your own business. This blog dives into the explanation regarding Section 43B(h) applicability and why paying your MSME suppliers promptly is no longer just good business practice, it’s tax-smart decision too.

Overview

The New clause Section 43B(h) is a subsection of Section 43 b of Income Tax Act, has been added in Income Tax Act, 1961 for the social and economic welfare of small and medium enterprises and to ensure the payments are made on time. Pay up on time! Section 15 of the MSME Development Act says big companies must pay smaller ones within 45 days to get tax benefits on those payments. Late payments cost you. The tax deduction will not be allowed for the payment made to MSME vendors beyond 45 days of deadline. There are forms need to file like E form MSME -1.

Different types of enterprise according to the MSME Development Act, 2006.

There are 3 types of enterprise based on investment and turnover as per MSME Development Act, 2006

• Micro Enterprises: Picture a vendor selling pickles from her cart. Her ingredients and equipment cost less than Rs. 1 crore, and her annual sales barely touch Rs. 5 crores. This tiny but mighty business is what we call a “micro enterprise.”
• Small Enterprise: Now see a bookstore loaded with curated reads. Their shelves and inventory might be less then Rs. 10 crores, and their sales can climb up to Rs. 50 crores. This “small enterprise” is steadily growing and leaving its mark on the literary world.
• Medium Enterprise: Finally, visualize an electronics store showcasing the latest gadgets. Their technology and infrastructure investments stay below Rs. 20 crores, and their sales land within Rs. 100 crores. This “medium enterprise” is a driving force, employing teams and constantly innovating, one circuit board at a time

Impact on outstanding MSME Creditors

Imagine your business is like a house, and taxes are like rent. You got to pay them to keep things running smoothly. Now, some of your suppliers are like those helpful neighbours who lend you a cup of sugar now and then—the ones registered as Micro or Small MSMEs. If you owe them money as of March 31st, 2024, it’s like forgetting to pay them back for that sugar. And the government doesn’t like that! Pay up on time! Section 15 of the MSME Act 2006 says big companies must pay smaller ones within 45 days to get tax benefits on those payments.

Here’s the deal:

• Check those bills! Make sure you’re not behind on payments to your MSME suppliers.
• Settle those debts ASAP! Pay them within those 15 or 45-day deadlines to avoid tax trouble that is MSME payment within 45 days of notifications need to be done.
• Remember: Late payments to those smaller suppliers can now bouquet you with extra taxes. Better to pay them on time and keep your finances blooming.

Consequences of failing to make payment to MSME Vendors

If a buyer, who is a micro or small enterprise, cannot pay the supplier for goods or services, they will face repercussions under the Finance bill 2023. This includes the imposition of compensatory interest liability as outlined in Section 16 of the MSME Development Act, 2006. Missed payments to small businesses? Be prepared for a financial repercussion mentioned below:

• Interest Sting: Miss a deadline? You’ll face triple-charged compound interest on the unpaid amount, accruing monthly until you settle. Think steep fines and a growing debt balloon!
• Tax Trap: Forget claiming that interest payment as a business expense. Now the interest paid will not be allowed as deduction.
• Expense Disallowance: Delayed payments to MSMEs? Sorry, those won’t count as approved business expenses anymore. Pay within the 15-day window or kiss that tax deduction goodbye!

Remember, prompt payments are key to healthy relationships with your suppliers, happy tax inspectors, and a lighter wallet. Don’t delay, pay up, and avoid these financial headaches!

Conclusion

By now, you understand how Section 43B (h) puts the pressure on prompt payments to your MSME suppliers. So, what’s the takeaway? Embrace the new financial landscape! Develop a robust payment system, communicate honestly with your suppliers, and prioritize those invoices. It’s a win-win situation – your MSME partners get their dues, and you stay in the good graces of the taxman. Remember, a healthy ecosystem starts with fair play, and with Section 43B (h), the playing field just got a lot fairer. Now go ahead and conquer those overdue bills, be a responsible citizen.