New Delhi (India), March 19: Starting from the year 2024-25, there’s a new rule for companies. They must pay any pending bills to small businesses within 45 days. If they don’t, they’ll have to pay more tax for the years 2023-24. This is because they can only claim deductions for payments they make in that year. Companies need to follow this rule to avoid extra taxes.
Udyam Registration:
Udyam Registration is an online registration process established by the Indian government to simplify the registration of MSMEs. It replaces the previous systems of EM-I/II and Udyog Aadhaar Memorandum (UAM). The primary objective of Udyam Registration is to provide MSMEs with a streamlined process to avail themselves of various benefits and incentives offered by the government. These benefits include easier access to credit, subsidies, & exemptions under different schemes.
MSME Classification Criteria:
The classification of enterprises as micro, small, or medium is based on two primary factors: investment in plant and machinery or equipment and turnover of the enterprise. As of the revised definition effective from July 1, 2020, the criteria are as follows:
| Type of Enterprise | Investment in plant and machinery or equipment | Turnover |
| Micro Enterprise | Not more than INR 1 Crore | Not more than INR 5 Crore |
| Small Enterprise | Not more than INR 10 Crore | Not more than INR 50 Crore |
| Medium Enterprise | Not more than INR 50 Crore | Not more than INR 250 Crore |
These criteria are used for classification and 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 usually record expenses when they happen (accrual basis), even if they haven’t paid for them 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 says that businesses must pay these MSME Registered Enterprises within 15 days, or up to 45 days if they have an agreement.
Starting from April 1, 2024, new tax laws in India require all types of businesses, like companies, sole proprietorships, partnerships, or LLPs, to pay their suppliers registered as MSMEs within 15 days, or up to 45 days if they have an agreement.
So, 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 have to change how they manage their money and make deals.
As per Section 15 of the MSMED Act, 2006, and Section 43B(h) of the Income-tax Act, 1961 says that businesses must pay for the goods or services purchased from businesses registered under MSME as follows
| SL No. | Contract Details | Where Supplier is registered as MSME | Where Supplier is NOT registered as MSME |
| 1 | Contract mentions 15 days as Credit Period | Within 15 Days | Section 43B (h) does not apply |
| 2 | Contract does not mention any Credit Period | Immediate | |
| 3 | Contract mentions 45 days as Credit Period | Within 45 Days | |
| 4 | Contract mentions 46 days as Credit Period | Within 45 Days |
If a business doesn’t comply with this regulation, they won’t 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 means their taxable income and business taxes could go up. Businesses are worried about this because 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, payer will be responsible to pay interest on the amount due, payable at bank rate notified by the Reserve Bank of India (RBI) for the period of appointed day or the date as per the agreement, as the case may be.
Further, it should be noted that Deduction of this interest will not be allowed as an expense under any section, as per 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. Following Benefits will accrue to MSME Units:
- Reduction in Disputes related to Payments
- Cashflow will improve
- Certainty of Planning will increase.
- 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 & 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 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.
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