The Finance Act, 2023, introduces significant changes with the insertion of clause h in section 43B of the Income Tax Act, strengthening the enforcement of MSME payment regulations. This analysis dives into the implications for small businesses, examining the provisions of the Income Tax Act, 1961, and the MSMED Act, 2006.

Particularly, section 43B(h) is explored, addressing the disallowance of expenses for payments not made within the specified time limit. This post delves into the definitions of micro, small, and medium enterprises (MSMEs) and the crucial payment periods outlined in the MSMED Act. With insertion of clause (h) in section 43B by the Finance Act, 2023 the provisions of MSMED, Act 2006 have been given a strong enforcement with regards to payment of small businesses.

According to MSMED Act, 2006 an enterprise is classified as Micro, small or medium enterprise on the basis of its turnover and investment in plant & machinery as follows:

Investment in Plant & Machinery &  Turnover Limit

Micro -Investment in Plant & Machinery not more than 1 Crore & Turnover not more than 5 crore

Small-Investment in Plant & Machinery not more than 10 Crore & Turnover not more than 50 crore

Medium- Investment in Plant & Machinery not more than 50 Crore & Turnover not more than 250 crore

Further, Sec. 15 of the MSMED Act, 2006 provides that the buyer has to make payment to the micro or small supplier for any goods purchased or services availed from such supplier within 45 days if there is any agreement in writing or within 15 days from the date of acceptance or actual delivery in absence of such agreement. It further provides that in no case the period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the day of acceptance.

Section 43B(h) imposes a compliance requirement on taxpayers to ensure that payments to micro and small enterprises are made in a timely manner to avail tax benefits. This aligns with the objective of MSMED Act which emphasizes prompt payment to MSMEs for their goods and services.

Please find attached a letter containing the format to be sent to creditors for ascertaining their MSME status.

DOWNLOAD DRAFT LETTER

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