GST: Boon or Burden? The Impact on India’s MSMEs

Got a mountain of unpaid bills from your smaller suppliers? Section 43B(h) of the Income Tax Act is shaking things up, meaning delays in settling those MSME bills can now hurt your own business. No more kicking the can down the road! This blog tackles everything you need to know about Section 43B(h) MSME amendment applicability and why paying your MSME suppliers promptly is no longer just good business practice, it’s tax-smart too. In this blog we will get to know impact of GST on MSME.

Overview

The New clause Section 43B(h) is a subsection of Section 43 b of Income Tax Act, has been added in Income Tax Act, 1961for the social and economic welfare of small and medium enterprises and to ensure the payments are made on time. Pay up on time! Section 15 of the MSME Development Act says big companies must pay smaller ones within 45 days to get tax benefits on those payments. Late payments cost you. The tax deduction will not be allowed for the payment made to MSME vendors beyond 45 days of deadline. There are forms need to file like E form MSME -1. 

Deadline’s ticking for big companies to pay smaller ones as per Section 15 of MSME Act

According to the MSME Development Act, 2006, Section 15 provides a definition that “If a supplier provides goods or services to a buyer, the buyer must make payment by the agreed-upon date as specified in writing or, if there is no prior agreement, before the appointed day.” The GST portal is used for GST login and MSME vendors can register themselves under that. 

As long as the duration agreed upon in writing does not surpass forty-five days from the date of acceptance or deemed acceptance, in any scenario. “The term ‘appointed day’ refers to the day that comes right after the fifteen-day period following the acceptance or deemed acceptance of goods or services by a buyer from a supplier.”

There are forms need to file like E form MSME -1. 

Different types of enterprise according to the MSME Development Act, 2006.

There are 3 types of enterprise based on investment and turnover as per MSME Development Act, 2006

• Micro Enterprises:  Picture a vendor selling pickles from her cart. Her ingredients and equipment cost less than Rs. 1 crore, and her annual sales barely touch Rs. 5 crores. This tiny but mighty business is what we call a “micro enterprise.”
• Small: Now picture a bookstore filled variety of books. Their investment in bookshelves and inventory might reach up to Rs. 10 crores, and their sales can go up to Rs. 50 crores. They’re a small enterprise, growing steadily and making a mark on the literary world.
• Medium: Finally, imagine a sleek electronics store, stocked with the latest gadgets. Their investment in technology and infrastructure is less then Rs. 20 crores, and their sales is less than 100 crores. They’re a medium enterprise, a driving force, employing teams and innovating with every new circuit board.

Consequences of failing to do payment to MSME Vendor in specified timeframe.

If a buyer, who is a micro or small enterprise, cannot pay the supplier for goods or services, they will face consequences under the Finance bill 2023. This includes the imposition of compensatory interest liability as outlined in Section 16 of the MSME Development Act, 2006. Moreover, this expense will be deemed ineligible for business purposes. The results will be:

• Interest Compensatory: If the buyer is unable to make the payment to the supplier as required by section 15, as stated in any agreement or regulation, they must still file the compound interest with monthly intervals on the amount owed from the designated day to the supplier. The interest rate should be three times the rate set by the Reserve Bank. The RBI has informed that the bank rate concerning the matter is equivalent to the current RBI repo rate.
• Tax Trap: Forget claiming that interest payment as a business expense. Now the interest paid will not be allowed as deduction. 
• Expense Disallowance: Delayed payments to MSMEs? Sorry, those won’t count as approved business expenses anymore. Pay within the 15-day window or kiss that tax deduction goodbye!

Remember, prompt payments are key to healthy relationships with your suppliers, happy tax inspectors, and a lighter wallet. Don’t delay, pay up, and avoid these financial headaches!

Conclusion

So, what’s the takeaway? Pay your MSME vendors on time! It’s good for their cash flow, good for karma, and now, thanks to Section 43B(h), good for your tax bill too. Embrace the new financial landscape! Develop a robust payment system, communicate honestly with your suppliers, and prioritize those invoices. It’s a win-win situation – your MSME partners get their dues, and you stay in the good graces of the taxman. Remember, a healthy ecosystem starts with fair play, and with Section 43B(h), the playing field just got a lot fairer. Now go ahead and conquer those overdue bills, be a responsible citizen.