The Government of India has introduced many schemes and incentives to help micro, small, and medium enterprises (MSMEs). These schemes, such as UDYAM registrations, ensure that MSMEs get easy credit access. This helps them continue their business operations without any disruptions.
One such benefit that the government offered MSMEs is the 45-day and 15-day payment rule, based on the credit period agreed upon between the buyers and suppliers (MSMEs, in this case).
According to the latest amendments, some changes were introduced in the matters of expenses incurred for the purchase of goods/services from the MSMEs. These changes will come into effect from
What are the tax implications of these changes, and how do they relate to Sections 15, 16 and 2 (b) of the MSME Act of 2006?
This blog will answer these questions. If you are a supplier dealing with MSMEs, it is a good idea to be aware of these changes. This way, you will know whether your expenses for supplies received from MSMEs are deductible.
Overview of 45-Day and 15-Day Payment Cycle
Before knowing about the tax structure of expenses for supplies received from MSMEs, it is good to know about the new payment terms granted to them. Here are the three most important points to know in this matter:
- If the buyer and supplier (MSME) have not mutually agreed upon the payment date, buyers have to pay the MSMEs within 45 days from the date of receiving the goods/services.
- If the buyer and supplier have agreed on a credit period of more than 45 days, the MSME Act of 2006 states that the payment still needs to be made within 45 days of receiving the goods/services.
- If the buyer and supplier have not agreed on any credit period, then the MSME regulation states that the payment has to be made to the suppliers within 15 days of receiving the goods/services.
Changes that Come Into Effect from 1st April 2024
All assessees should first prepare a list of all their vendors and collate a list of their entire payables as of the financial year ending 31st March 2024. This will help the assessees to know about the disallowance of pending payments as expenses, according to the Income Tax Act.
What are the points to consider about allowances and disallowances of pending payments as expenses?
Some important points that all suppliers should know about the allowance or disallowance of pending payments are:
- Situation 1
When the buyers haven’t paid the MSMEs within the 45-day or 15-day period (as the case may be), but they eventually make the payment before the end of the same financial year - suppliers can claim for deduction of expenses accrued in that year itself.
- Situation 2
When the buyers haven’t paid the MSMEs within the 45-day or 15-day period, but eventually make the payment at a future date - suppliers are eligible for deductions for the year in which they actually receive the payment.
- Situation 3
When the supplier had expenses accrued in one year, but made payment to the MSME in the next financial year, but within the credit period approved by the MSME Act – suppliers can claim deduction in the same year of accrual of expenses.
- Situation 4
When the supplier had expenses accrued in one year, but made payment to the MSME in the next financial year, but beyond the credit period approved by the MSME Act – suppliers can claim deduction only in the actual year of payment and not on an accrual basis.
What happens to the disallowance of expenses when bills are overdue under Section 43 (b)(H)?
When payment is not made to the MSME suppliers within the 15-day or 45-day payment cycle, no disallowance is granted under the Section 43 (b) (h). So, the allowance will be granted on actual basis only.
Points to Keep in Mind About These Recent Amendments
All the above-mentioned amendments regarding allowance/disallowance of pending payments to MSMEs will come into effect only on 1st April 2024. These changes are applicable for the Assessment Year of 2024-2025. Hence, they do not apply for amounts outstanding to MSMEs as of 31 March 2023.
Discussed below are some of the important points of the new Section 438 (h) of the Income Tax Act of 1961 for MSME payments
- All the above-mentioned changes apply to small and micro enterprises, not medium enterprises.
- When suppliers make delayed payments made before filing of Income Tax returns for that year, then deductions can be claimed only in the year of actual expenses, and not in the year in which they were accrued.
- If the supplier has not informed the MSMEs about his registration to the UDYAM scheme, then he cannot claim for disallowance under Section 438 (h) of the Income Tax Act of 1961.
Bottom Line
According to the recent amendments, suppliers can attract disallowance under Section 438 (h) of the Income Tax Act, even if they aren’t registered under the MSME Act. Therefore, suppliers must be aware of these new amendments so that they can have a clear understanding of their tax liabilities. This way, they can find a middle ground between the Income Tax Act and the MSME Act, and use it to their benefit.
