The clause (h), which will come into effect on April 1, 2024 with 2024-25 as the assessment year (that is financial year 2023-24), aims to address the issue of delayed payments by disallowing expenses to buyers on invoices from MSEs unless paid within stipulated time.
The government in last year’s budget had proposed an amendment to Section 43B of the Income Tax Act to insert a new clause (h) as an additional measure to address the challenge of delayed payments faced by MSMEs in the country, hindering the flow of working capital and overall business growth.
The clause (h), which will come into effect on April 1, 2024 with 2024-25 as the assessment year (that is financial year 2023-24), aims to address the issue of delayed payments by disallowing expenses to buyers on invoices from MSEs unless paid within 45 days (where agreement exists) and within 15 days if there is no agreement.
Section 43B essentially provides a list of expenses allowed as deduction under the head ‘Income from business and profession’ only in the year of actual payment instead of the year when it was incurred as an expense.
Similarly, in case of payment due to the MSME, the clause (h) maintains that the amount to be paid to the MSME beyond the time limit specified (45 days or 15 days) in the MSME Development Act to be allowed as a deduction for the buyer only in the year in which the payment was made.
This means that first, invoices issued before April 1, 2023, as well as outstanding dues as of March 31, 2023, remain unaffected by the amendment and second, no check or consequences apply to delays in payment to MSEs during the financial year, provided the payment is made by March 31, 2024.
This implies that if an invoice raised on April 1, 2023, is paid on March 31, 2024 (after a full year), the expense will be permissible.
| Invoice date | Credit period | Actual Payment date | Total days | Deduction |
| March 15, 2024 | up to 15 days | March 30, 2024 | 15 | Allowed in FY24 |
| February 16, 2024 | up to 45 days | March 31, 2024 | 45 days | Allowed in FY24 |
| March 14, 2024 | up to 45 days | May 03, 2024 | 50 days | Allowed in FY25, not FY24 |
| March 31, 2024 | up to 15 days | April 10, 2024 | 10 days | Allowed in FY24 |
| March 25, 2024 | up to 15 days | April 15, 2025 | 21 days | Allowed in FY25, not FY24 |
Importantly, wholesale and retail traders registered with the MSME Ministry’s Udyam registration portal are eligible for only credit benefits from financial institutions under the priority sector lending norms. Hence, clause (h) doesn’t apply to payment delayed to such traders.
Other than the current measure, buyers failing to pay MSMEs on time need to submit a half-yearly return to the Ministry of Corporate Affairs stating the amount of payments due and the reasons for the delay.
Moreover, according to the MSME Samadhaan, the buyer has to pay compound interest with the monthly rests to the MSME on the amount at 3x of the bank rate notified by the Reserve Bank of India in case the payment is not made within 45/15 days.
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