Considering that various government departments do bulk purchases from MSMEs, the finance ministry should bring all the government departments also under this rule, said industry stakeholders.
The budget proposed an amendment to Section 43B of the Income Tax Act. It ensures that the buyers can claim deduction in income tax only on payments made to a MSME supplier. In short, a company can’t claim the expense under the act until the payment has actually been made to the seller. The proposal was made to resolve the long-standing delayed payments’ problem of MSMEs and provide them a much-needed liquidity boost.
A Clause (h) will be inserted in Section 43B of the Income Tax Act stating that any sum payable by an assessee to MSME beyond the time limit (45 days) specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, will be allowed as deduction only when the payment has been made to the MSME. The amendment will come into effect from April 1, 2024.
While presenting the budget, Sitharaman said, “In order to promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of Section 43B of the Act. Thus, a deduction for such payments would be allowed only when actually paid. It will be allowed on accrual basis only if the payment is within the time mandated under the Micro, Small and Medium Enterprises Development Act.”
Vinod Chopra, Managing Director, Sai Industrial Alliances, said, “Now, in 43B (h) clause, if buyers take an invoice from an MSME, they will have to actually make the payment to the MSME in order to take a deduction in the income tax for that particular expenditure. Otherwise, it will be added to their income. This is a very dangerous provision for defaulters. Others should not have to worry.”
But there is no clarity on the payments made by government departments and these can also be among the major defaulters.“Public undertakings and big enterprises have good cash flows and they will do it. But, if we talk about the railways, or about any other central department per se, which is under the National Treasury, they don’t claim any income tax deduction. Defense doesn’t have any income tax deduction, nor does the police department and the paramilitary forces. Major payments are delayed by these big departments, including the railways. So, the finance ministry should look into this and also bring all central and other government departments under the same umbrella. More than Rs 6 lakh crore of MSME purchase is currently happening by the central government departments,” added Chopra.
Experts said through the budget, the government has sent a clear message to large corporations that they should not hold back dues to MSMEs any longer.
Samir Kanabar, Tax Partner, EY India, said, “It seems that the government is gradually tightening the regulations or introducing deterrents in stages as against bringing in much stringent regulations in one go. Initially, a law was introduced with a requirement to make adequate disclosures in financial statements. On the basis of such disclosures, the government seems to have noticed that substantial amounts are due to MSMEs and as a consequence, the proposed tax disallowance law has been introduced. If the dues continue to remain, further stringent laws may be introduced.”
He, however, points out that one of the challenges of the proposed tax disallowance law is that even dues payable by micro and small enterprises to their counterparts would also get disallowed. “This may not be the intention of the law,” added Kanabar.
The budget had also proposed the extension of the Credit Guarantee Scheme to help the liquidity-starved MSME sector, along with an additional infusion of Rs 9,000 crore. The government expects the infusion to enable collateral-free credit of Rs 2 lakh crore to small businesses. It had introduced the Emergency Credit Line Guarantee Scheme (ECLGS) in 2020 after the Covid pandemic began. The scheme’s deadline was later extended to March 2023 from March 2022.
The finance minister had also proposed that micro enterprises with a turnover of up to Rs 2 crore and certain professionals with a turnover of up to Rs 50 lakh can avail the benefit of presumptive taxation. The budget proposed to provide enhanced limits of Rs 3 crore and Rs 75 lakh, respectively, to taxpayers whose cash receipts are no more than 5% of the total receipts.
