In the budget presented on 1st of February 2023, the Hon’ble Finance Minister of the country has proposed that any sum which is payable to micro and small enterprises will be allowed as a deduction for computing the taxable income of the assessee in the year of payment, in case the same is not paid within the time limit specified under Section 15 of the MSMED Act, 2006.

The proposed amendment to Section 43B of the Income Tax Act, 1961 is being brought into the statute for promoting timely payments to micro and small enterprises. The proposed amendment provides that any sum payable by the assessee to micro and small enterprises beyond the time limit specified in Section 15 of the MSMED Act, 2006 shall be allowed as a deduction only in the year of payment. Section 15 of the MSMED Act, 2006 provides that the payments to micro and small enterprises must be made within the time as per the written agreement with them which cannot exceed 45 days. In the event of no written agreement with the MSEs, the payment has to be made within a period of 15 days.

The implication of the aforesaid amendment would be that an assessee using the services of an MSE or making any procurement from an MSE will be under an obligation to make the payment within the stipulated time otherwise the same will be disallowed in the year in which it has been incurred and would be allowed only in the year in which the actual payment is made to the MSE.

There is an existing provision with respect to payment of interest on pending payment to MSE beyond the period of 45 days as contained in Section 16 of the MSMED Act, 2006. The Income Tax Act further provides for disallowance of the said interest which is to be paid to micro and small enterprises in Section 23 of the MSMED Act, 2006.

Although the amendment seems to be in the interest of MSE but the same is going to create a lot of issues for the assessee. Besides tracking the MSEs, the assessee would be expected to first of all calculate the outstanding payments to MSE as of the end of the financial year and thereafter calculate the amount which has become overdue resulting in disallowance as per the new proposed provision. The same will be carried forward to the next year and would create a lot of reconciliation and explanation problems as the same will not be evident from the financial statements of the assessee. The reporting of such disallowance would itself be a huge task.