26 Mar Analysis of Section 43B(h) Regarding Disallowance of Delayed Payments to MSEs
Navigating the intricacies of financial regulations, particularly concerning Micro, Small, and Medium Enterprises (MSEs), requires a comprehensive understanding of pertinent legal frameworks. At the heart of this lies Section 43B(h) of the Income Tax Act, which addresses the disallowance of delayed payments to MSEs. This provision, intricately linked to Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), plays a pivotal role in ensuring timely payments to MSEs and upholding their financial stability.
Overview of MSMED Act and Section 43B(h)
Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act):
- Section 43B(h) pertains to Section 15 of MSMED Act.
- MSMED Act, 2006 consists of 32 sections and has been in force since October 2, 2006.
- Chapter V of the MSMED Act deals with Delayed Payments to MSEs, encompassing sections 15 to 25.
- Section 2 of MSMED Act defines key terms used in Section 15 such as "appointed day," "buyer," "goods," and "supplier."
- Chapter V remains unaffected by 43B(h) without any repeal, amendment, or override.
Key Provisions of Chapter V of MSMED Act:
- Chapter V has been effective since October 2, 2006, and applies when a buyer purchases goods/services from a supplier.
- The term "supplier" is defined under Section 2(n) as a Udyam-Registered MSE.
- Section 15 imposes a time limit for payment to the MSE supplier.
- Section 16 mandates interest on late payments at a rate of 20.25% (3 times the Bank Rate) compounded monthly.
- Section 23 disallows interest on delayed payments in income tax assessments, with the disallowance being permanent and irreversible.
- Section 24 gives precedence to sections 15 to 23 over other laws.
Understanding Section 43B(h):
- Section 43B(h) supersedes other sections except for specific exemptions.
- It disallows deductions otherwise allowable under the Act for any sum payable by the assessee to a micro or small enterprise beyond the specified time limit under Section 15 of the MSMED Act.
- Sums payable to MSEs become overdue under Section 15 if not paid within the stipulated time frame.
- Such overdue sums are disallowed under 43B(h) if claimed on an accrual basis, with disallowance being reversible in the year of actual payment.
- Query arises regarding the interest liability for outstanding purchases from MSEs prior to April 1, 2023.
Issues and Resolution
- Scenario: Opening balance (credit) of ₹40L, purchases in FY 2023-24 amount to ₹10L, payments made total ₹30L, with a balance of ₹20L on March 31, 2024.
- Question: Can the buyer argue that the outstanding ₹20L pertains to the opening balance, thus nothing should be disallowed under Section 43B(h) for Assessment Year 2024-25?
Applicability of Section 43B(h) to Different Buyer-Entities
Entities Covered by Section 43B(h):
- Buyer-entities operating on a cash system.
- Buyer-entities eligible for and choosing to opt for section 44AD/44ADA/44AE/44BBB/115VA.
- Charitable trusts and institutions enjoying exemptions under sections 11 to 13.
- Buyer-entities with no Profits and Gains of Business or Profession (PGBP) such as Government Departments, Salaried individuals, and Consumers.
- Applicability of Chapter V of MSMED Act.
- Impact on Udyam-registered MSME buyer-entities.
- Consideration for non-corporate buyers exempt from tax audits due to turnover being ≤₹10 cr and 95% of transactions being through prescribed cashless modes.
Understanding Section 15 of MSMED Act
- Trigger for Section 15: When a supplier provides goods or services to any buyer.
- Significance of "any" in the definition of "deposit" reflects the broad scope intended by the Legislature.
- Definition of "supplier" as an MSE who has undergone Udyam Registration.
- Interpretation of "goods" includes all types of movable property except actionable claims and money.
- Inclusion of tangible and intangible properties as goods clarified by legal precedents.
- Ambiguities regarding the inclusion of services within the definition of goods.
- Questions arise regarding various transactions such as purchase of capital goods, intangible assets, software, and availing professional services like legal and audit services.
- Uncertainty regarding works contracts falling under goods and services categories.
Timelines under Section 15 of MSMED Act
- Obligation for the buyer to make payments within the specified time under Section 15.
- Acceptability of paying the bill amount excluding GST in cases involving Input Tax Credit (ITC) concerns.
- Relevance of the invoice receipt date for determining the due date under Section 15.
- Timelines calculated from the delivery of goods or services by the supplier.
- Computation of timelines in cases of written objections by the buyer.
- Payment due within 15 days if no written agreement exists on credit period.
- Agreed due date not exceeding 45 days if a written agreement on credit period exists.
- Consideration for public/national holidays affecting due dates.
- Application of Section 10 of GC Act, 1897 in cases involving prescribed periods.
- Examination of limitations and possibilities regarding written agreements on credit periods, including retroactive agreements and terms specified on purchase orders or invoices.
Applicability of Section 43B(h) in various situations
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Purchases pertain to
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When paid
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Timely /Late
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When deductible u/s 43B(h)
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|---|---|---|---|
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Prior to 01.04.2023
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--
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-
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NA
|
|
FY 2023-24
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FY 2023-24
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Timely
|
AY 2024-25
|
|
FY 2023-24
|
FY 2023-24
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Late
|
AY 2024-25
|
|
FY 2023-24
|
FY 2024-25
|
Timely
|
AY 2024-25
|
|
FY 2023-24
|
FY 2024-25
|
Late
|
AY 2025-26
|
Notification No. S.O 2119(E), dated 26.06.2020
Enterprise Classification Criteria
Definition of Enterprises:
- Definition of Enterprises:
- Micro enterprise: Investment in plant and machinery or equipment ≤ ₹1 crore and turnover ≤ ₹5 crore.
- Small enterprise: Investment in PME ≤ ₹10 crore and turnover ≤ ₹50 crore.
- Medium enterprise: Investment in PME ≤ ₹50 crore and turnover ≤ ₹250 crore.
- Composite Criterion for Classification:
- Enterprises move to the next higher category if either limit is exceeded.
- Reversion to a lower category occurs only if both investment and turnover fall below the specified ceilings.
- Units with the same GSTIN listed under the same PAN are collectively treated as one enterprise for investment and turnover calculations.
Identification of MSE Suppliers and Application of Section 43B(h), Sections 16 & 23, MSME Form-1
Considerations:
- Inclusion of unregistered MSE suppliers.
- Determination of MSE status for Udyam-Registered and unregistered suppliers.
- Requirement of financials/ITRs/GSTRs from each supplier for MSE status.
- Necessity of a CA certificate from each supplier.
- Consideration of medium enterprises as suppliers.
- Inclusion of capital goods suppliers.
- Evaluation of MSE suppliers with UAM/EM-II registrations.
- Inclusion of trading MSE suppliers.
- Assessment of MSE suppliers engaged in both trading and manufacturing/service.
Applicability of 43B(h) to Udyam-Registered and Unregistered MSEs
Considerations:
- Requirement of UR for availing schemes/benefits.
- Comprehensive understanding of Notification 2119 beyond Para 1.
- Application of the "उपक्रमोपसंहारो" Rule cited by the Supreme Court.
Interpretation of the Notification Using the “उपक्रमोपसंहारो” Rule
Process of Becoming an Enterprise:
- Online filing of UR based on self-declaration.
Registration Process:
- Compulsory submission of PAN and Aadhaar.
- Compulsory GSTIN, unless exempted under the CGST Act.
- Features of the Udyam Portal:
- Automatic linkage of PAN and GST details with investment and turnover data from government databases.
- Full integration with Income Tax and GSTIN systems.
Calculation of Investment in PME
- Method: Investment equals Written Down Value (WDV) as per Income Tax Return (ITR) minus costs related to pollution control, Research and Development (R&D), and industrial safety devices. (As per Office Memorandum dated 6th August 2020 & Item 20 of Udyam Registration Form)
- Linked to: Previous years' ITR filings.
Calculation of Turnover
- Exclusions: Exclude export of goods or services.
- Linked to: Information on turnover and exports to be linked to either ITR or GSTIN.
Updating Turnover & Investment in PME Figures and Reclassification
- Information Updation: Classification will be updated based on information provided or gathered from Government sources, including ITR or GSTR.
- Communication: Enterprises will be notified of any graduation or reverse-graduation.
- Transition Period: Enterprises undergoing upward change in investment or turnover leading to reclassification will retain non-tax benefits of their previous category (micro, small, or medium) for 3 years from the date of such change.
- Implication: A small enterprise growing to a medium one can still avail provisions for delayed payment under Chapter-V of the MSMED Act, 2006.
Udyam Registration Number (URN) & Udyam Registration Certificate (URC)
- Search Feature: No PAN-based or name-based search for MSE status on Udyam portal.
- Verification: Udyam Verify feature allows verification of URN authenticity and access to URC.
- Status Indication: URN does not indicate Micro/Small/Medium status.
- Process: Obtain URN and access URC on the portal.
- Supplier Communication: If supplier hasn't included URN on invoice, request confirmation of MSE status within 15 days.
- Legal Implication: Section 43B(h) cannot be invoked until URN is furnished, as name-based/PAN-based search is not enabled currently, citing legal precedence.
Considerations for Buyer-Entities in Udyam Certificate
- Accessing Udyam Certificate: Access through Udyam Number on Udyam portal.
- Key Information: Date of UR at the bottom of URC.
- Retrospective Nature: Udyam Registration is not retrospective, hence supplies made prior to UR date are not covered under various sections including 43B(h) and sections 15, 16, 22, and 23 of MSMED Act.
- Enterprise Activity: If URC indicates only trading activity, transactions with the MSE URC-holder fall outside the purview of relevant sections of MSMED Act and Section 43B(h).
- Classification Details: Effective date of classification is provided.
Enterprise classification on URC as appearing under “Enterprise Type”
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S No
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Classification Year
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Enterprise Type
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Date of Classification
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|---|---|---|---|
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1.
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2023-24
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Medium
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09/05/2023
|
|
2.
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2022-23
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Medium
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26/06/2022
|
|
3.
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2021-22
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Medium
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16/05/2021
|
|
4.
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2020-21
|
Small
|
21/08/2020
|
Clarification on Udyam-Registered Medium Enterprises as “Suppliers”
Identification of Udyam-Registered Medium Enterprises as Suppliers:
- Determining when a Udyam-Registered medium enterprise qualifies as a "supplier."
- Criteria for considering a medium enterprise as Micro or Small for Section 43B(h).
- Provision allowing a small enterprise transitioning to Medium to avail of delayed payment benefits under Chapter-V of the MSMED Act, 2006.
Understanding “Actual Payment” for Section 43B(h)
Defining “Actual Payment”:
- Various scenarios and considerations regarding what constitutes "actual payment" under Section 43B(h).
- Issues including cash payments violating specified sections, acceptance of suppliers as partners, payment through bills of exchange, payment in kind, and payment through issuance of equity shares or debentures.
- Clarifications on post-dated cheques and the effective date of payment.
Effective Date of Payment by Cheque:
- Legal precedents and interpretations regarding payment by cheque.
- Relevance of cheque encashment date to determine the date of payment.
- Judicial rulings and implications on payment methods in commercial transactions.
Utilizing Equity Shares/Debentures for MSE Supplier Payments
Use of Equity Shares/Debentures for MSE Supplier Payments:
- Instances where debentures or shares are issued in lieu of outstanding payments to MSE suppliers.
- Legal perspectives and court rulings affirming the issuance of shares or debentures as valid payment for MSE dues.
- Implications for interest liabilities and discharge of debts through share or debenture issuance.
Auditors’ Responsibilities and Risk Assessment
Role of Auditors:
- Responsibilities of auditors in verifying supplier balances and confirming MSE status.
- Risk assessment considerations related to potential suppression of trade payables and delayed cheque encashments.
- Steps for auditors to ensure accurate reporting and verification of payments to MSE suppliers.
Opportunities for Professionals and Businesses
Professional and Business Opportunities:
- Opportunities for Udyam-Registered MSE professional firms regarding timely payments under Section 15 of MSMED Act.
- Growth trends in Udyam Registration and MSME turnover data.
- Opportunities for professionals to assist MSEs in registration, restructuring, and compliance.
- Scope for software development and drafting agreements to facilitate MSE transactions.
- Assistance in scrutiny of supplier documents and compliance with Section 15 stipulations.
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