End of FY 2024-25: Compliance with Section 43B(h) for MSME Payments; Know Why It is Important?

With the financial year 2024-25 coming to an end, businesses must maintain compliance with several tax regulations to avoid disallowances and penalties. The addition of Section 43B(h) to the Income Tax Act is a significant amendment that came into effect on April 1, 2023 (FY 2023-24 and AY 2024-25).

This amendment emphasises timely payments to Micro and Small Enterprises (MSMEs), which strengthens their financial stability and ensures sector liquidity.

Despite expectations of a deadline extension for this clause, the government has granted no relief as of yet. As a result, businesses must comply with this requirement by March 31, 2025, to avoid adverse tax consequences.

Section 43B(h) for MSME

Section 43B of the Income Tax Act enables specified deductions based on actual payment rather than accrual. Other payments under Section 43B are eligible for deduction if made before the due date for submitting the return under Section 139(1), although payments to MSMEs are not eligible for this relaxation.

Key Provision of Section 43B(h)

• Any sum payable to a Micro or Small Enterprise outside the time limits specified in Section 15 of the MSMED Act, 2006, may be deducted only in the year of actual payment.
• The buyer’s registration under the MSMED Act is optional; only the seller’s MSME registration determines applicability.
  This clause does not apply to medium-sized organisations.

What is Micro and Small Enterprises?

The MSME categorisation is based on investment in plant and machinery/equipment, as well as annual turnover. This is as follows:

Payment Timelines under MSMED Act 2006

As per Section 15 of the MSMED Act of 2006:

• If there is no written agreement, payment is due within 15 days.
• If a written agreement exists, payment is due within 45 days.

Failure to pay by these deadlines results in ineligibility for deductions until the actual payment year.

Impact on Taxable Income

• Payments made after the permitted period are added to the assessee’s taxable income for the financial year.
• Deductions for such payments are only allowed in the year in which the payment is made.
• Late payments are charged compound interest at three times the RBI-notified bank interest rate.

Disallowance and Interest Expense under Section 37

Interest on delayed payments to MSMEs is deemed penal interest, which is disallowed under Section 37.
Compound interest on late payments must be paid regularly, even if the supplier does not need it.

Understand with Example

To clarify the impact of this amendment, let’s examine a few cases:

Important Takeaways for Businesses

• To claim deductions in FY 2024-25, ensure that payments to Micro and Small Enterprises are made on schedule before the end of the financial year.
• Check the supplier MSME registration status to see if Section 43B(h) applies.
• Reconcile outstanding payments to MSMEs and prioritise their clearance by March 31, 2025.
• Making payments within the timeframe specified will help you avoid paying penal interest.
• Update accounting software and internal processes to detect payments that are approaching their due dates.

Conclusion

Compliance with Section 43B(h) is essential for businesses that work with MSMEs when the financial year ends in 2024-25. Because no relief has been given by the government, firms must pay overdue MSME dues by March 31, 2025, to avoid disallowances and tax burdens. Timely action will enable easy compliance while avoiding additional financial burden.