MSME got 8 benefits from Budget, is there any relief for MSME 45 Days payment Rule 43B (h)?

Recently budget 2024 was presented on 23 July 2024 in which many relief were announced for MSME which are as below:

1. Credit Guarantee Scheme for MSMEs in the Manufacturing Sector

To facilitate term loans for MSMEs for the purchase of machinery and equipment, a new credit guarantee scheme will be introduced. This scheme will allow MSMEs to secure loans without collateral or third-party guarantees by pooling credit risks. A self-financing guarantee fund will provide a guarantee cover of up to ₹100 crore per applicant. The borrower will be required to pay an upfront guarantee fee and an annual fee based on the reducing loan balance.

2. New Assessment Model for MSME Credit

Public sector banks will develop in-house capabilities to assess MSMEs for credit, moving away from reliance on external assessments. This new model will utilize the digital footprints of MSMEs, offering a more comprehensive evaluation beyond traditional asset or turnover criteria. This approach aims to cover MSMEs lacking a formal accounting system.

3. Credit Support During Stress Periods

A new mechanism will ensure continued bank credit to MSMEs during periods of stress. When MSMEs are in the ‘special mention account’ (SMA) stage for reasons beyond their control, they often need credit to sustain their operations and avoid slipping into the Non-Performing Asset (NPA) category. The government-promoted fund will provide guarantees to support credit availability in such situations.

4. Enhanced Mudra Loans

The budget increases the limit of Mudra loans under the ‘Tarun’ category from ₹10 lakh to ₹20 lakh. This enhancement is specifically for entrepreneurs who have availed and successfully repaid previous loans, encouraging further business growth.

5. Reduced Turnover Threshold for TReDS

To help MSMEs unlock working capital by converting trade receivables into cash, the turnover threshold for mandatory onboarding on the Trade Receivables Discounting System (TReDS) platform will be reduced from ₹500 crore to ₹250 crore. This inclusion will bring 22 more Central Public Sector Enterprises (CPSEs) and 7000 additional companies onto the platform, also expanding the scope to medium enterprises.

6. Expansion of SIDBI Branches

The Small Industries Development Bank of India (SIDBI) will open new branches to increase its presence in major MSME clusters. Over the next three years, 24 new branches will be established, expanding service coverage to 168 out of 242 major clusters, thereby providing direct credit to MSMEs.

7. Financial Support for Food Irradiation and Quality Testing

The budget allocates financial support for setting up 50 multi-product food irradiation units in the MSME sector. Additionally, the establishment of 100 food quality and safety testing labs with NABL accreditation will be facilitated, ensuring higher standards in food processing.

8. E-Commerce Export Hubs

To enable MSMEs and traditional artisans to access international markets, E-Commerce Export Hubs will be set up in a public-private partnership (PPP) model. These hubs will offer a seamless regulatory and logistical framework, providing trade and export-related services under one roof, thus facilitating global trade for MSMEs.

But during budget announcements MSME’s were waiting for the deletion of Clause 43(b)(h) which is 45 days payment rule.

Effective from April 1, 2023 (FY 2023-24 & AY 2024-25), the amendment made in Section 43B(h) of the Income Tax Act marks a significant step towards ensuring timely payments to Micro and Small Enterprises (MSMEs). This amendment is designed to bolster the financial health of MSMEs, vital contributors to India’s economic growth, Introduction new section 43B(h), but business were not happy with this because of huge compliance burden, but no change is made by Budget 2024

Businesses were waiting for Date extension of this clause but till date no extension is given by the government so you should comply this till 31 March

Understanding Section 43B(h)

Section 43B(h) mandates that any sum payable by the assessee to a Micro & Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed only in computing the income of the previous year in which the sum has been actually paid.

Applicability of Clause (h) of Section 43B

Clause (h) of Section 43B applies when an enterprise purchases goods or avails services from an enterprise registered under the MSMED Act, 2006. Notably, registration of the buyer under the MSMED Act is not mandatory. This clause comes into effect from April 1, 2023.

Definition of Micro & Small Enterprises:

Composite Criteria: Investment in Plant & Machinery/equipment and Annual Turnover

Micro Enterprises, as per the MSMED Act, have investments in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores.

Small Enterprises, on the other hand, have investments not exceeding 10 Crores and turnover not exceeding 50 Crores.

Payment Timelines for Micro & Small Suppliers

Enterprises are required to make payments to Micro & Small suppliers within 15 or 45 days, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. If there is a written agreement, payment shall be made as per the agreed-upon timeline, not exceeding 45 days.

Impact on Taxable Income

Failure to make payments to Micro & Small Enterprises within the specified time frame leads to the amount becoming taxable income for the assessee in the previous year of non-payment. The deduction is allowed only in the year when the payment is made. Non-compliance may also result in compound interest obligations to the supplier at three times the RBI-notified Bank Interest.

Interest Expense and Section 37

Interest incurred for delayed payment to Micro & Small Enterprises is considered penal interest and is disallowed under Section 37 of the Income Tax Act. The enterprise is obligated to pay compound interest at monthly rests, even if not demanded by the supplier.

Practical Examples

Consider a scenario where A sells goods to B on July 1, 2023. B makes the payment on February 1, 2024, which is after the allowed 45 days but before March 31, 2024. According to the Income Tax Act, the payment is allowed in the previous year 2023-24. However, B must pay compound interest to A at three times the RBI Bank Rate from the due date till the payment date. This interest expense is disallowed while computing income under the PGBP head.

More In depth Examples for clarity

Watch this video for easy understanding

6 Cases when this rule is not applicable:

1. If you are filing your ITR under section 44AD
2. If your Creditors are Traders
3. If your Creditor is not registered under MSME
4. IF Your Creditor is Medium Enterprise
5. IF you bought Fixed assets or capital goods from a creditor
6. Not applicable on Opening Creditors

How to Check MSME status of creditors

Watch below video to know

Section 43B(h) underscores the importance of timely payment obligations to Micro & Small Enterprises, fostering a conducive environment for their sustenance and growth. Adherence to specified payment periods is critical for both buyers and sellers in the MSME sector to navigate the tax landscape effectively. Non-compliance may lead to disallowances, impacting taxable income and incurring additional compound interest obligations. Understanding these implications is essential for businesses to nurture a healthy and compliant environment within the MSME sector.

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