Big Push by Indian Government to support Micro or Small Enterprises – MSEs

With the introduction of amendments to the Income Tax Act,1961, the Indian Government has introduced legal changes to incentivize prompt payment of dues to Micro or small enterprises (‘MSEs’) by business enterprises.  This is a positive step as it will provide considerable financial support to UAE Companies in India which are MSEs.

For the calculation of business income, on which tax is to be charged, expenses incurred for business purposes are deducted.  Under the mercantile system of accounting, expenses are recorded when they became due, and not when they are actually paid.  With the recent amendments to Section 43B of the Income Tax Act, changes have been introduced to this provision, so that certain deductible expenses will only be recognized in the year they are actually paid, regardless of when the obligation to pay them arose.

Finance Act 2023 added a new clause (h) in Section 43B which stipulates that any amount owed by a taxpayer to an MSE beyond the time limit specified in the Micro, Small and Medium Enterprises Development Act of 2006 (‘MSMED Act’) will only be deductible in the year it is physically paid, irrespective of when the liability originated.  The underlying objective of this amendment is to encourage prompt payment to MSEs by business entities, thereby bolstering the financial stability of these enterprises. This legislative shift applies from the assessment year 2024-25 onward, affecting payments due to MSEs on or after April 1, 2023.

 Relevant provisions of MSMED Act: As per Section 15 of MSMED Act, buyers of goods or services from an MSE supplier are legally obliged to make payment on or before the date agreed upon between them.  However, the agreed period cannot exceed 45 days from the day of acceptance.

In cases where there is no prior agreement between the parties in this regard, payment to a MSE supplier has to be made by the buyer by the day following 15th day of acceptance of goods or services.

The day of acceptance of goods or service means the day of the delivery of goods or rendering of service. However, where a written objection is made by the buyer to the supplier regarding the goods or service within 15 days of the day of delivery, then the day of acceptance means the day when the objection is removed by the supplier.

Who are the Micro and Small Enterprises?

Micro and Small Enterprises, as defined by their investment in plant and machinery and annual turnover, encompass various entities such as companies, co-operative societies, trusts, or bodies constituted under any law.:

Compliance issues

• The new provision applies only to purchases from suppliers registered as a Micro or Small enterprise. The buyer can obtain declaration from the supplier regarding its status under the MSMED Act or check supplier’s MSE registration at https://udyamregistration.gov.in/udyam_verify.aspx.
• The new provision has no bearing on any advance payment to an MSE which will continue to be deductible in the year of payment.
• The provision does not apply to purchase of capital goods from MSEs.
• The provision is applicable for calculating taxable profits in regular assessment and does not apply for calculation of Minimum Alternate Tax.
• If the sum payable to an MSE includes GST but the buyer does not to claim input tax credit treating GST amount as an expense, then the purchase cost and GST will be deductible in the year of actual payment. Where the buyer claims GST as input tax credit, then only the purchase cost will be deductible in the year of payment.
• The payments coming within the ambit of the new provision are required to be reported by the auditors in Tax Audit Report.

Conclusion: 

In conclusion, the revised provision in Section 43B of the Income Tax Act entails that for purchases from MSEs, failure to remit payment within the stipulated 15 or 45-day period, as applicable, results in the deduction of expenses only in the year of actual payment, rather than the year in which they were incurred. This underscores the importance of timely payments to MSEs and aligns with broader efforts to support and sustain these enterprises.

Shahid Khan, former member CBDT, is a Senior Partner and Head Direct Taxation Practice at Kochhar & Co. (Advocates & Legal Consultants). Reena Khair is a Senior Partner & Head of Indirect Tax and International Trade at Kochhar & Co. For any queries, they may be reached at corporate@kochhar.com.

About Kochhar & Co. 

Kochhar & Co.is one of India’s pre-eminent corporate law firms. With a full-service presence in seven (7) prominent cities namely New Delhi, Mumbai, Bangalore, Chennai, Gurgaon, Hyderabad and Chandigarh and four (4) overseas offices – Dubai, Singapore, Chicago, and Toronto, Kochhar & Co. has a reputation for cutting edge legal expertise, clear and commercially driven advice, and an unwavering commitment to our clients’ needs through delivering bespoke, sustainable, and innovative legal solutions.