As the March 31 fiscal year comes to a close, a new 45-day rule will be applicable to companies starting from Assessment Year 2024-25. Due to the new Clause (H) inserted in Section 43B of the Income-tax Act, 1961 by the Finance Act passed in 2023, companies will be mandated to pay pending bills to MSMEs within just 45 days. Failure to do so will make the companies pay additional tax for the years 2023-24. The move comes as the companies can only claim deductions for payments they make in that year. Thus, to avoid extra taxes companies have been asked to follow this rule.
Udyam Registration
Udyam Registration- An online registration process established by the government of India with an aim to simplify the registration of MSMEs. It replaces the earlier systems of EM-I/II and Udyog Aadhaar Memorandum (UAM). The main objective of Udyam Registration is to provide MSMEs a streamlined process to avail themselves of benefits and incentives offered by the government. These benefits include quick access to credit, subsidies, and exemptions under different schemes.
MSME Classification Criteria
The MSME classification criteria of enterprises as micro, small, or medium is done on the basis of two factors: investment in plant and machinery or equipment and turnover of the enterprise. As per the revised definition effective from July 1, 2020, the criteria are as follows:
These criteria are used for the purpose of classification and availing various benefits available to MSMEs, like priority sector lending, subsidies, incentives, etc.
Latest Tax Compliance Rules: Explained
Businesses in India mostly record expenses when they occur (accrual basis), even if they haven’t made the payment yet. However, Section 15 of the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, and newly enacted Section 43B(h) of the Income-tax Act states that businesses are required to pay these MSME Registered Enterprises either within 15 days or up to 45 days in case of an agreement between the two.
Starting from April 1, 2024, new tax regulations in India mandate all types of businesses, such as companies, sole proprietorships, partnerships, or LLPs, to pay their suppliers registered as MSMEs within 15 days, or up to 45 days in case there is an agreement between them.
Thus, if a company fails to make a payment to a small MSME unit for over 45 days by March 31, 2024, and the payment is made after April 1, 2024, it will have to count this amount as an expense in the financial year 2024-25, and not 2023-24. This indicates companies might have to alter how they manage their money and make deals. According to Section 15 of the MSMED Act, 2006, and Section 43B(h) of the Income-tax Act, 1961 businesses ought to pay for the goods or services bought from businesses registered under MSME as mentioned below:
If a company fails to comply with this regulation, they will not be allowed to deduct these payments as expenses in the same year they incur them. Rather, they can only deduct them in the year they make this payment. Simply speaking, these expenses can’t be claimed on an accrual basis, but on a payment basis. Companies are worried about this because this could mean they have to pay additional taxes in the year 2024-25.
Penalty for Failure to Pay MSMEs Within the Time Frame specified under section 43B(h)
In case of delayed payment to an MSME registered unit, the payer will be responsible for paying interest on the due amount, payable at the bank rate notified by the RBI for the period of the appointed day or the date according to the agreement, as the case may be.
Besides, the Deduction of this interest will not be treated as an expense under any section, as per the Income-Tax Act, 1961.
Impact on Udyam Registered Units
SMEs get numerous benefits from the Udyam Registration certificate. These benefits include access to different government schemes, subsidies, and incentives. With the insertion of new Section 43B(h) listed below are the benefits that will accrue to MSME Units:
- Reduction in Disputes related to Payments
- Improvement in Cashflow
- Certainty of Planning will be high.
- More Bargaining Power.
Ensuring Compliance and Mitigating Risks
Udyam registered units should prioritize timely payment of supplier dues to ensure compliance with Section 43B(h). This involves keeping meticulous records of such payments and ensuring they are paid within the stipulated period.
Leveraging Benefits Via Compliance
Udyam registered units can also leverage Section 43B(h) as an opportunity to improve their financial management practices. By maintaining accurate records and sticking to payment deadlines, SMEs can show their commitment to transparency and accountability. This, in turn, improves their credibility among stakeholders, including lenders, investors, and government agencies.
Navigating Challenges and Seeking Support
Despite trying their best, Udyam registered units may face challenges ranging from cash flow constraints to complexities in understanding tax regulations while complying with the aforesaid Section 43B(h). In such situations, SMEs should seek assistance from industry associations, professional networks, and government bodies.
Building Trust and Reputation
Compliance with Section 43B(h) ensures adherence to legal obligations and also plays an important role in building trust and reputation for Udyam registered units. Timely payment of supplier and statutory dues reflects the integrity and reliability of SMEs, promoting trust among customers, suppliers, and other business partners.
Evaluation and Improvement
Compliance with the new clause Section 43B(h) is not just a one-time task but a continuous commitment for Udyam registered units. It needs regular assessment of financial practices, monitoring of regulatory changes, and proactive adjustments to align with evolving tax requirements.
Disclaimer- The above information has been extracted from the press release that has been provided by PNN ANI. The news agency will not be responsible in any way for the content of the same.
The article has been re-written by OneNDF staff.
