Section 4B amendment in respect of Payment to MSE Payments and Its Impact on Tax Computation
Section 43B contains provisions about “Income from Business and Profession.” It lists all those expenses that business entity can seek as deductions from their business income only in the financial year when they make the actual payment or payment before filing of income tax return, disregarding the year when the entity incurred such expenses.
As per the amendment made by the Finance Act, 2023, where payment to a ‘Micro’ or ‘Small’ vendor registered under MSME Act, is not made within the period specified u/s 15 of MSMED Act, 2006, the expense from MSME shall not be allowed under Income tax laws.
Time limit specified u/s 15 of the MSMED Act,2006 is :
If they are paid within 15 days in cases where there is no agreement.
OR
45 days or as per the period in a pre-defined written agreement, whichever comes first.
Finance Act 2023 has done the addition of the MSE payments clause (h) in Section 43B which prove as a cornerstone amendment to streamline the payment receipt process for MSE Ventures. The amendment lays down following rules :
Expenses in relation to purchases of goods or services made from MSE Vendor will be disallowed if payment is made beyond the above specific time-limit and not before the end of the financial year.
Deduction for the Disallowed expenses will be available in the year of payment
Thus, above amendment has to be kept in mind by the taxpayer to avoid unnecessary disallowance and pre plan the payments to the MSE Vendors
Below illustration will help you to explain the amendment in various practical scenarios:
Illustration 1:
Mr A made a payment to an MSE after the time limit set by section 15 of the MSMED Act, 2006, but within the same financial year in which the expense was incurred.
In this situation, Mr A settled the payment after the specified time limit of Section 15 of the MSMED Act, 2006. This activates the revised provisions of Section 43B. However, as the payment was made within the same financial year that the expense was accrued, deduction shall be permitted in that financial year as outlined by the Income Tax Act, 1961 regulations.
Illustration 2:
Mr. C dealt with an MSE where he had expenses that accrued in March 2024. However, he paid the vendor during the subsequent financial year in April 2024, within the deadline specified under Section 15 of the MSMED Act, 2006.
In this situation, Mr. C made the payment as per the time limit specified under section 15 of the MSMED Act, 2006. Thus, in the financial year 2023-2024, Mr. C will be able to claim the payment in its tax on an accrual basis in expense year itself.
Illustration 3:
D incurred an expense in the financial year 2023-2024 that was payable to an MSE. However, he settled it in the subsequent financial year, 2024-25, after the expiration of the time limit specified in Section 15 of the MSMED Act, 2006.
In this situation, because D made the payment beyond the time limit specified in Section 15 of the MSMED Act, 2006, and in the subsequent year, 2024-25, D will not be eligible to claim a deduction for that payment in the financial year 2023-2024 when the expenses initially accrued. But will be able to claim expenses in the subsequent year i.e year of payment i.e 2024-25.