A new regulation has been introduced for Indian companies regarding the settlement of pending invoices with MSMEs
Introduction
In recent years, the Indian government has been striving to foster a conducive environment for Micro, Small, and Medium Enterprises (MSMEs), recognizing their pivotal role in economic growth and employment generation. However, a recent amendment to the Income Tax Act has sparked concerns among traders and tax practitioners, potentially undermining the government's efforts.
Understanding Section 43B of the Income Tax Act
Section 43B of the Income Tax Act serves as a mechanism for businesses to claim deductions from their taxable income for certain expenses incurred during the financial year. These deductions are allowed in the year of actual payment, regardless of when the expenses were accrued.
Introduction of Subsection 'h' to Section 43B
The Finance Act of 2023 introduced a new subsection, labeled 'h,' to Section 43B. This amendment permits deductions from business income upon the actual payment of any sum by the assessee to micro or small enterprises (MSMEs) within specified time limits. These time limits are set at 15 days from the date of acceptance of supply or 45 days in case of any agreement between buyers and MSMEs.
Implications and Concerns
The rationale behind the introduction of subsection 'h' was to promote timely payments to MSMEs, thereby supporting their financial health and sustainability. However, this move has inadvertently led to apprehensions among traders and businesses.
One major concern is the potential disallowance of deductions from business income if payments to MSMEs are not made within the stipulated time frame. This fear arises from the fact that failure to adhere to the 45-day payment window could result in a significant increase in tax liability, including interest and penalties, amounting to approximately 40%.
Voices from the Industry
Narendra Kapadia, Director of the Confederation of West Bengal Trade Associations, highlights the divisive impact of the amendment on businesses with varying credit periods. Businesses accustomed to longer credit periods find themselves at a disadvantage, potentially leading to reluctance in purchasing from MSMEs.
The Confederation emphasizes that the amendment, intended to benefit MSMEs, could paradoxically render purchases from them economically unviable for buyers. This situation has already prompted cancellations of orders and MSME registrations.
The All India Federation of Tax Practitioners echoes these sentiments, with its National President, Narayan Jain, emphasizing the challenges faced by traders in making purchases from MSMEs due to concerns regarding the disallowance of outstanding purchase amounts at the year-end.
Call for Action
In light of these concerns, stakeholders, including trade associations and tax practitioners, have called for a review of subsection 'h' to Section 43B. Suggestions include relaxing the time limits and allowing payments within the due date of filing income tax returns.
The urgency of this matter is underscored by the ongoing Lok Sabha Election days, with stakeholders emphasizing the need for swift action to address the challenges faced by businesses.
Conclusion
The introduction of subsection 'h' to Section 43B aimed to bolster the financial health of MSMEs by ensuring timely payments from buyers. However, unintended consequences have emerged, leading to apprehensions among traders and businesses.
As stakeholders advocate for a review of the amendment, it becomes evident that striking a balance between promoting MSMEs' interests and ensuring a conducive business environment is imperative. Swift action is necessary to address these concerns and foster a thriving ecosystem where both MSMEs and businesses can flourish.