Prompt Payment to MSME Vendors – New Compliance measure by the Finance Ministry

The Finance Act 2023 with its effective date from 01.04.2024 has brought in a very significant
change in the Section 43B of the Income Tax Act 1961 by insertion of sub section (h) to that
section, by which the deduction in respect of any sum payable by the assessee to a micro or a
small enterprise beyond the time limit specified in Section 15 of the MSMED Act 2006 shall be
allowed in computing the income referred to in Section 28 of that pervious year in which such
sum is actually paid by him.

What is Micro and Small Enterprises?

As per the latest Gazette Notification S.O. 2119 (E) dated 26th June 2020 the definition of Micro
and Small enterprises are as under:
Micro Enterprises - where the investment in plant and machinery or equipment does not exceed
one crore rupees and turnover does not exceed five crore rupees.
Small Enterprises - where the investment in plant and machinery or equipment does not exceed
ten crore rupees and turnover does not exceed fifty crore rupees.

Enterprises Investment in Plant and Turnover

Machinery or Equipment
Micro Enterprises </= 1 Crore </= 5 Crores
Small Enterprises </= 10 Crores </= 50 Crores
** Both the conditions are cumulative.

What is Section 15 of MSMED Act 2006?

Section 15 of MSMED Act 2006 deals with the liability of the buyer to make payment to the
MSME vendor. As per that Section where a MSME supplier supplies any goods or renders services
then the buyer shall make the payment:
• On or before the date agreed between them in writing
• In case there is no such agreement, before the appointed date
Appointed date is the date immediately after the expiry of 15 days from the day of
acceptance or deemed acceptance of goods or services.
The proviso the Section 15 of the MSMED Act specifies that in cases where the agreement
exists between the supplier and the buyer, the agreement cannot specify a day beyond 45
days from the day of acceptance or deemed acceptance.
 Day of Deemed
Day of Acceptance
Acceptance

Where no objection is
Where objection is
raised by the buyer in
Day of actual Delivery made in writing by
writing regarding
of goods or Rendering buyer - within 15 days
acceptance of goods
of Services from day of delivery of
or services within 15
goods or service
days -

The day on which such The day of actual

objection is removed delivery of goods or
by the supplier services

Breifing of Section 43B (h):

Section 43B allows deduction on actual payment basis to the assessee and now after insertion
of this sub-section (h), the deduction with respect to the purchases from the MSME vendors can
be allowed as deduction only when payment is made to them:
1. Either on or before the year end i.e., 31st March of the financial year or
2. In case of no written agreement with the vendor - for those invoices which are raised by
the supplier beyond 15th March of the financial year, the payment has to be made within
15 days from the appointed day, which will fall after the balance sheet date.
3. In case of written agreement with the vendor - for those invoices which are raised by the
supplier beyond 14th February of the financial year, the payment has to be made within
45 days from the appointed day, which will fall after the balance sheet date.
Note: Auditors shall audit these payments beyond the balance sheet date as per the SA 560
“Subsequent Events”

Proviso to Section 43B provides that where the actual payment is made by the assessee after the
year ending date (i.e., 31st March) but on or before the due date U/s 139(1) then disallowance
under this section will not be applicable. But the very important point to note is such proviso
is not applicable to sub section (h) of Section 43B.
Key takeaways

1. Send a mail to your vendor as to whether they are classified as a micro or small
enterprises and obtain their Udyam registration certificate.
2. Make an agreement with these vendors who are classified as micro or small enterprises,
to fix the appointed day.
Note that appointed day cannot be beyond 45 days from the day of acceptance or
deemed acceptance.
3. Make prompt payment to these vendors to avoid disallowance under Section 43B.