Introduction
Starting from the fiscal year 2024-25, a new regulation has been implemented for Indian companies regarding the settlement of pending invoices with small businesses. According to this regulation, companies are required to clear any outstanding bills owed to small businesses within 45 days of receipt. Failure to adhere to this requirement will result in these companies facing higher tax liabilities for the fiscal year 2023-24. This is due to the fact that they can only claim deductions for payments made in the same year. It is imperative for companies to comply with this rule in order to avoid additional taxes.
Udyam Registration
Udyam Registration is an online registration process established by the Indian government to simplify the registration of Micro, Small, and Medium Enterprises (MSMEs). It replaces the previous systems of EM-I/II and Udyog Aadhaar Memorandum (UAM). The primary goal of Udyam Registration is to provide MSMEs with a streamlined process to avail various benefits and incentives offered by the government, including easier access to credit, subsidies, and exemptions under different schemes.
MSME Classification Criteria
Enterprises are classified as micro, small, or medium based on two main factors: investment in plant and machinery or equipment, and turnover of the enterprise. The criteria for classification, effective from July 1, 2020, are as follows:
Micro Enterprises: Investment up to Rs. 1 crore and turnover up to Rs. 5 crore.
Small Enterprises: Investment up to Rs. 10 crore and turnover up to Rs. 50 crore.
Medium Enterprises: Investment up to Rs. 50 crore and turnover up to Rs. 250 crore.
These criteria are used for classification and for availing various benefits provided by the government to MSMEs, such as priority sector lending, subsidies, incentives, etc.
Understanding the Latest Tax Compliance Guidelines: Section 43B Explained
In India, businesses typically record expenses when they occur (accrual basis), even if they have not yet paid for them. However, Section 15 of the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, and the newly enacted Section 43B(h) of the Income-tax Act, 1961 stipulate that businesses must pay MSME Registered Enterprises within 15 days, or up to 45 days if there is an agreement.
Starting from April 1, 2024, new tax laws require all types of businesses, including companies, sole proprietorships, partnerships, or LLPs, to pay their suppliers registered as MSMEs within 15 days, or up to 45 days if there is an agreement.
Therefore, if a company owes money to a small MSME Registered Enterprise for more than 45 days by March 31, 2024, and pays after April 1, 2024, they can only count it as an expense in the financial year 2024-25, not 2023-24. This means companies might need to revise how they manage their finances and negotiate deals.
As per Section 15 of the MSMED Act, 2006, and Section 43B(h) of the Income-tax Act, 1961, businesses must pay for the goods or services purchased from businesses registered under MSME as follows:
If a business fails to comply with this regulation, they will not be able to deduct these payments as expenses in the same year they incur them. Instead, they can only deduct them in the year they pay. In other words, these expenses will not be allowed to be claimed on an accrual basis, but on a payment basis. This could lead to an increase in their taxable income and business taxes. Businesses are concerned about this as it could mean they have to pay more taxes in the year 2024-25.
Penalty for Failure to Pay MSMEs Within the Time Frame specified u/s 43B(h)
In case of late payment to an MSME registered unit, the payer will be responsible for paying interest on the amount due, payable at the bank rate notified by the Reserve Bank of India (RBI) for the period from the appointed day or the date as per the agreement, as the case may be. It should be noted that deduction of this interest will not be allowed as an expense under any section of the Income-Tax Act (ITA), 1961.
Impact on Udyam Registered Units
Udyam Registration certificate offers SMEs numerous benefits, including access to various government schemes, subsidies, and incentives. The benefit of Section 43B(h) is a new feather in MSMEs' cap. The following benefits will accrue to MSME Units:
Reduction in Disputes Related to Payments.
Improvement in Cash flow.
Increase in Certainty of Planning.
Increased Bargaining Power.
Ensuring Compliance and Mitigating Risks
To ensure compliance with Section 43B(h), Udyam registered units must prioritize timely payment of supplier dues. This involves maintaining meticulous records of all such payments and ensuring they are cleared within the stipulated timelines.
Leveraging Benefits Through Compliance
While ensuring compliance with Section 43B(h) may seem daunting, Udyam registered units can also leverage it as an opportunity to enhance their financial management practices. By maintaining accurate records and adhering to payment deadlines, SMEs can demonstrate their commitment to transparency and accountability. This, in turn, enhances their credibility among stakeholders, including lenders, investors, and government agencies.
Navigating Challenges and Seeking Support
Despite their best efforts, Udyam registered units may encounter challenges in complying with Section 43B(h). These challenges could range from cash flow constraints to complexities in understanding tax regulations. In such scenarios, SMEs should proactively seek support from industry associations, professional networks, and government bodies offering advisory services. Collaborating with peers and sharing best practices can also provide valuable insights for addressing common compliance hurdles.
Building Trust and Reputation
Compliance with Section 43B(h) not only ensures adherence to legal obligations but also plays a crucial role in building trust and reputation for Udyam registered units. Timely payment of supplier and statutory dues reflects positively on the integrity and reliability of SMEs, fostering trust among customers, suppliers, and other business partners.
Evaluation and Improvement
Achieving and maintaining compliance with Section 43B(h) is not a one-time effort but an ongoing commitment for Udyam registered units. It requires continuous evaluation of financial practices, monitoring of regulatory changes, and proactive adjustments to ensure alignment with evolving tax requirements. SMEs should establish robust internal controls and mechanisms for regular audits to identify potential areas of non-compliance and address them promptly.
Conclusion
In summary, compliance with Section 43B(h) of the Income Tax Act, 1961 is crucial for Udyam registered units. Timely payments to small businesses are necessary to avoid tax penalties and fully capitalize on the benefits of Udyam Registration. Leveraging digital tools, seeking expert guidance, and fostering a culture of continuous improvement are key strategies for navigating tax compliance and ensuring sustained growth. Once, Timely payments are done by every component of the business cycle, it will have a positive impact on every businessman & economy as a whole.