Starting from April 1, 2024 (AY 2024-25), Section 43B(h) of the Income Tax Act introduces significant changes concerning expenses related to purchases or services from Micro and Small Enterprises (MSMEs). Here are the key points:
Expenditure Related to Purchases/Services from MSMEs:
As per Section 43B(h), expenses incurred for purchases or services taken from MSMEs will only be allowed as a deduction if the payment is made within the time limits specified by the MSME Act.
The MSME Act mandates that buyers must make payments to suppliers within the agreed-upon time frame.
According to Section 15 of the MSME Act, the buyer’s liability to make payment is as follows:
Payment should be made on or before the date agreed upon between the buyer and the supplier in writing.
If there is no written agreement, payment should be made before the appointed day.
The appointed day is the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of goods or services by the buyer from a supplier.
Day of acceptance refers to the actual delivery of goods or rendering of services, while day of deemed acceptance occurs when no objection is made in writing by the buyer within fifteen days from the delivery/rendering date.
Disallowance of Expenses:
If payments to MSMEs are due for more than 45 days (or 15 days, as specified) but are made before the end of the financial year, the deduction of the expense will be available in the same year itself.
It is essential for every assessee to maintain a comprehensive list of vendors to determine their payables as of March 31, 2024. This computation is relevant for both tax audit and non-tax audit cases.
Amount of Allowance/Disallowance:
If payments exceed the specified time limits, disallowance may occur under Section 43B.
However, if the payment is made before the end of the financial year, the expense deduction remains available.