The Government of India has introduced many schemes and incentives to help micro, small, and medium enterprises (MSMEs). These schemes, such as UDYAM registrations, ensure that MSMEs get easy credit access. This helps them continue their business operations without any disruptions.
One such benefit that the government offered MSMEs is the 45-day and 15-day payment rule, based on the credit period agreed upon between the buyers and suppliers (MSMEs, in this case).
According to the latest amendments, some changes were introduced in the matters of expenses incurred for the purchase of goods/services from the MSMEs. These changes will come into effect from
What are the tax implications of these changes, and how do they relate to Sections 15, 16 and 2 (b) of the MSME Act of 2006?
This blog will answer these questions. If you are a supplier dealing with MSMEs, it is a good idea to be aware of these changes. This way, you will know whether your expenses for supplies received from MSMEs are deductible.
The Government of India has introduced many schemes and incentives to help micro, small, and medium enterprises (MSMEs). These schemes, such as UDYAM registrations, ensure that MSMEs get easy credit access. This helps them continue their business operations without any disruptions.
One such benefit that the government offered MSMEs is the 45-day and 15-day payment rule, based on the credit period agreed upon between the buyers and suppliers (MSMEs, in this case).
According to the latest amendments, some changes were introduced in the matters of expenses incurred for the purchase of goods/services from the MSMEs. These changes will come into effect from
What are the tax implications of these changes, and how do they relate to Sections 15, 16 and 2 (b) of the MSME Act of 2006?
This blog will answer these questions. If you are a supplier dealing with MSMEs, it is a good idea to be aware of these changes. This way, you will know whether your expenses for supplies received from MSMEs are deductible.
Overview of 45-Day and 15-Day Payment Cycle
Before knowing the tax structure for costs for supplies purchased from MSMEs, it’s beneficial to be aware of the latest terms of payment that they are granted. Here are three important facts to be aware of about this issue:
If the supplier and buyer (MSME) are not able to come to an agreed on the date for payment Buyers must be able to pay MSMEs in 45 days of the date of receipt of the products or services.
If the supplier and buyer have negotiated an extended credit period of longer than 45 days it is the MSME Act of 2006 states that the purchase has to be paid within 45 days after receiving the products or services.
If the purchaser and supplier do not agree on a credit timeframe, then the MSME regulations stipulate that the payments must be made to supplier within fifteen days of the date they received the items or services.
Changes that take Effect on 1 April 2024. April 2024.
All assessees are required to first compile an inventory of all their suppliers and create the list of all their payments as of the financial year that ended on 31 St. March 2024. This will allow assessors understand the prohibition of paying pending taxes as expenses, in accordance with the Income Tax Act.
What should you be aware of regarding allowances and exclusions of unpaid expense payments?
A few important facts that every supplier should be aware of regarding the allowance or denial of payments pending are:
- Situation 1
If the buyers haven’t yet paid their MSMEs during the 45 or fifteen-day period (as the situation might be) however, they do make the payment prior to the end of the year’s financial year, suppliers can be able to claim deductions for the expenses incurred in that year.
- Situation 2
If buyers haven’t yet paid their MSMEs during the 45 day and 15-day periods and then pay at the future, suppliers can be eligible for deductions for the year during which they actually receive the money.
- Situation 3
If the supplier’s expenses incurred in a single year, and made a payment to the MSME during the following year’s financial year, but not within the credit period that was approved in the MSME Act – suppliers can be eligible for deduction from the year in which they made payment of the expense accrued
- Situation 4
If the supplier has expenses incurred in one fiscal year, but paid to the MSME during the following financial year, however it was not within the credit period allowed under the MSME Act The supplier can only claim deductions in the year of the payment, not on an accrual-based basis.
What is the effect of allowing costs when bills are due pursuant to Section 43 (b)(H)?
If payment is not made by the MSME providers within 15 days or the 45-day payment cycle, there is no disallowance granted under section 43 (b) (h). Therefore the allowance will be granted on an actual basis only.
Points to Keep in Mind About These Recent Amendments
All the above-mentioned amendments regarding allowance/disallowance of pending payments to MSMEs will come into effect only on 1st April 2024. The changes will be applicable to all of the Assessment Year of 2024-2025. This means that they will not apply to outstanding amounts due to MSMEs on the 31st of March 2023.
Below are a few of the key points in the brand new section 438 (h) of the Income Tax Act of 1961 for MSME payment
- The above changes are applicable to micro and small businesses and not medium-sized enterprises.
- If suppliers delay payments that are not filed prior to filing income Tax returns for the year, then deductions may be claimed only during the year in which actual expenses were incurred and not the year they were incurred.
- If the supplier hasn’t provided the MSMEs with information about his registration with the UDYAM scheme and has not informed them about his registration, he is not eligible to claim to be disqualified pursuant to the section 438 (h) of the Income Tax Act of 1961.
Bottom Line
As per the new modifications, suppliers may be subject to exclusion pursuant to the section 438 (h) of the Income Tax Act, even when they’re not registered in the MSME Act. So, it is imperative that suppliers are aware of these changes to ensure that they be aware of their tax obligations. In this way, they will be able to discover a compromise in between Income Tax Act and the MSME Act, and use it to their advantage.