Wholesale and Retail Trade is not applicable in Section 43B(h)

The landscape of taxation and deductions in India, as governed by the Income Tax Act 1961, presents a provision of wholesale and retail trade that aims to streamline tax labilities, ensure timely payments and promote a fair taxation system. One of the critical sections under this Act is Section 43B, which deals with the deduction of certain expenses while computing taxable income.  Section 43B(h) became the latest news headlines after an amendment was introduced to this section, specifically Section 43B(h), which has significant implications for businesses, especially those falling under the Micro, Small, and Medium Enterprises (MSME) category. This article delves into the implications of Section 43B(h) of Income Tax Act not being applicable to wholesale and retail trade and exploring the nuances.

Understanding Micro, Small and Medium Enterprises-

• Micro Enterprises: Enterprises whose investment in plant and machinery doesn’t exceed 1 crore and turnover of the previous year doesn’t exceed 5 crore shall be categorized under micro enterprises.
• Small Enterprises: Enterprises with investment in plant and machinery not exceeding 10 crore and turnover of previous year not exceeding 50 crore are Small enterprises.
• Medium Enterprises: Enterprises whose investment in plant and machinery doesn’t exceed 50 crore and turnover of the previous year doesn’t exceed 250 crore are medium enterprises.

Understanding Section 43B(h) of Income Tax Act 1961-

• Objective: Section 43B(h) of Income Tax Act was inserted to promote timely payments to micro and small enterprises. This section of Income Tax Act provides that any sum payable by the assesses to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment irrespective of previous year in which the liability to pay such sum is incurred by the assesses
• Effective Date: Section 43B(h) comes into effect from April 1, 2024, covering the assessment year 2024–2025 and subsequent years.
• Time Limit for Payment: Business enterprises, including traders are required to pay MSMEs in the following time frames:
  If there is a written agreement, payment should be made within 45 days.
  In the absence of a written agreement, payment must be made within 15 days.
• GST Disallowance:  If the sum payable to MSMEs including GST attracts Section 43B(h) disallowance, such disallowance shall be restricted to the amount excluding GST if the GST is claimed as Input Tax credit (ITC) in books of accounts.

Section 43B(h) Applicability to Wholesale and Retail Traders

Now, let’s focus on the applicability of Section 43B(h) specifically to wholesale and retail trade:

• Udyam Registration: As per an Office Memorandum issued on July 2, 2021, wholesale and retail traders are entitled to Udyam registration only for the benefit of Priority Sector Lending. This means that while they can avail of certain benefits related to lending, other advantages available under the MSMED Act do not apply to traders.
• Dues Outstanding: Consequently, Section 43B(h) is not applicable for dues outstanding to traders as per the MSMED Act’s definition of an enterprise. In simple terms, traders cannot claim deductions under this provision for payments beyond the stipulated deadlines.

Time Limit for Payment

Business enterprises, including traders, are required to pay MSMEs within specific time frames:

• Written Agreement: If there is a written agreement, payment should be made within 45 days.
• No Written Agreement: In the absence of a written agreement, payment must be made within 15 days.

Penalties

If enterprises fail to make payment to MSMEs within time limit, interest shall be applicable for making such delayed payment as compound interest at the times of the bank rate notified by the Reserve Bank of India (RBI). However, deduction of this interest shall not be allowed as an expense according to Income Tax Act 1961. 

Benefits of Clause (h) of Section 43B of Income Tax Act-

• Timely cash flows: MSMEs incentives allow payment to be made to them within specified time frame of 15 days in case of no written agreement and 45 days in case of written agreement. This ensures timely cash flows between the enterprises and smooth payment cycle.
• Time and resource saving: Since section 43B(h) ensures timely payment it reduces the risk of legal and other disputes among the enterprises which may arise out of outstanding dues, thereby saving time and resources.
• Better Bargaining Power: The provision ensures and provides better bargaining power to MSMEs and push them for deadlines aligned within the stipulated time frame. 

Exceptions

The provisions of section 43B(h) doesn’t apply if the buyer is filling income tax return under Section 44AD, 44ADA or 44AE since these sections have an overriding effect over Section 28 to 43C of MSME Act, 2006. 

Conclusion

While Section 43B(h) provides much-needed relief to MSMEs, it’s essential for traders to understand its limitations. By adhering to the payment timelines set by the MSMED Act, businesses can optimize their tax planning while supporting the growth of micro and small enterprises.