How Section 43B of Income Tax Act Benefits MSMEs

Section 43 B of the Income Tax Act is a crucial tool for MSMEs in managing finances and complying with tax regulations. This section allows for several deductions on an actual payment basis, including expenses such as taxes, interest, and employee contributions. These deductions are only applicable during the relevant financial year when accrued or incurred. 

To understand section 43 B of the Income Tax Act, this blog will explore its implications for MSMEs: how the section aligns their cash flow management and focuses on growth. Timely payment of statutory liabilities helps MSMEs become financially disciplined.

Budget 2024 update

A significant update in the budget of 2024 introduces 43b of the Income Tax Act. The amendment focuses on timely payments to MSMEs. The new provision of section MSME 43b (h) needs to :

1. Improve the working capital availability of MSMEs 
2. Encourage on-time payments of these enterprises

Here are some more details:

• Any money payable to a micro or small enterprise can be deducted in the same year if paid within the specified period. This clause has been applicable since FY 2023-24.
• It should be noted that the buyers of the MSME are not required to register under the MSME Act.
• If a buyer does not pay the MSME within 45 days, the deductions will be deferred until the year the payments are made.
• This change, effective April 1, 2024, applies to the financial year 2024-2025 and subsequent years. It provides MSMEs with a clear framework for managing their finances and ensuring timely payments.

What is section 43b MSME?

Section 43B refers to the head‘ Income from business and profession’. This means some statutory expenses can be claimed as deductions from business income only during the actual payment year, irrespective of its liability accrual.

Section 43b allows individuals to claim deductions for specific payments only in the year when those payments were made rather than when they were incurred or accrued. The following 

are some examples:

• Outstanding GST Liability: There is a business with an outstanding GST liability of Rs. 50,000 for the financial year ending March 2024.
• Condition for Deduction: Under Section 43B of the Income Tax Act, the business can claim this expense as a deduction only if the GST payment is made by March 31, 2024.
• Delayed Payment: If the business does not settle this liability within the given time and instead makes the payment in August 2024, the deduction cannot be claimed for the financial year ending March 2024.
• Deduction Eligibility: In this scenario, the deduction for the GST expense will be allowed only in the financial year ending March 2025, as the payment was made in that period.

What deductions are specified under section 43b of the Income Tax Act?

Section 43B applies to certain expenses that are allowed only if dues are paid within the time limit specified in the Income Tax Act.

The following deductions are specified under section 43b

• Employer contributions to Employee Welfare Funds: Employer contributions to an employee's PF, ESI, Gratuity, and other welfare funds are deductible if paid by the due date for a deposit or before the deadline of the income tax filing return.
• Statutory Dues like Taxes, Cesses, or Fees: The statutory dues like deduction of tax, cess, duty, or fee-only on actual payment include GST, customs duties, other levies, and their interest.
• Bonus and Commission for Employees: Any bonus and commission payable to employees are deductible under section 43B of the Income Tax Act. The bonus and commission should have been paid before the due date of filing the income tax return.
• Leave Encashment: Leave encashments by employees are eligible for deduction under the 43b MSME Act.
• Interest on Borrowings: Interest on loans from Public Financial Institutions, State Financial Corporations, or State Industrial Investment Corporations is deductible under the 43b Income Tax Act.
• Payment to Indian Railway: If any payment is made to the Indian Railways for using Railways Assets, it is deductible.
• Overdue Payment to Micro or Small Enterprises: Payments due to Micro or Small Enterprises are deductible only if paid within the time limit specified under section 15 of the MSME Act, 2006.

What are the payments under section 43b?

Seven payment types are included in section 43 b of the Income Tax Act. Below are the payments in detail:

• Contribution made towards Employee Benefits: This essentially includes the amount paid by the Employer for Employee welfare funds, such as 1)Provident Fund, 2)Gratuity, and 3)Superannuation Fund.

• Tax payment: Payments made by the assessee in the form of taxes, cess, and duty to the government qualify under section 43b of the Income Tax Act. The interest paid on these is also included in the taxes.
• Bonuses or commissions: Money paid to employees as bonuses or commissions is also deductible. However, dividends paid to shareholders are not included. 
• Interests payable on loans and advances: Interests paid from ‘scheduled banks’ are covered, provided the loans were taken under specific terms and conditions of the concerning agreement.
• Leave encashment: Employ's leave balance payments are included under section 43b of the Income Tax Act.
• Payment to Indian Railways: Amounts paid to Indian Railways can be claimed as expenses under section 43b of the Income Tax Act. However, the payment should be made in the fiscal year 2016-17 to qualify. If payment is delayed beyond the deadline for return filing, it will be allowed for deduction in the year of the actual payment. 
• Interest payable on loans: Interest on loans from state financial corporations or public financial institutions is deductible. The loans should comply with prescribed guidelines.

What are the exceptions under section 43b of the Income Tax Act?

Individuals who pay taxes can claim deductions under Section 43B of the Income Tax Act by complying with an accrual-based accounting system. To maximise the deductions, certain conditions must be met with:

• If the taxpayer chooses a mercantile accounting system.
• When all expenses are settled either before or by the deadline for submitting income tax returns.
• Substantial evidence must be given by taxpayers of all payments when filing income tax returns.

It must be noted that converting interest liabilities into share capital is not covered by Section 43B of the Income Tax Act. Also, taxpayers must remember that the section does not apply to payments made on or before the due date for filing income tax returns under Section 139(1) of the Act.

What are the conditions for claiming a deduction under section 43b of the Income Tax Act?

Here are the conditions to avail of the deductions under section 43B of the Income Tax Act:

1. Payment has been made: To claim deduction under section 43 B of the MSME Act, a payment must be made, not just accrued for that year. For instance, if the employer announces a bonus for an employee and the employee is paid in the next financial year, then the amount to be paid can not be claimed for deduction for the first year.
2. The payment must have been cleared before the due date: The payment must have been made on or before the date specified under the referred law. 
3. Payment must be compulsory: Payment made by the employer must be mandatory and not optional. 
4. Payment must be documented: Payment made by the employer or individual must be in written documents; payment made in cash can not be claimed as a deduction.

Conclusion

Section 43b of the Income Tax Act allows specific deductions only on actual payments. Besides having financial discipline, it complies with taxes and employee obligations and supports better cash flows, avoiding penalties. It is essential to understand Section 43b well for sustained growth and seamless operations.

FAQs

Q1. What is Section 43 B of the MSME Act?

Ans. Payments for goods or services are to be paid within 45 days fron the due date of delivery as mandated by Section 43 B(h). If the MSME is unable to meet the deadline, it will not be able to claim these payments as tax deductions.

Q2. What is section 43B?

Ans. To claim a deduction under section 43B, the payment needs to have been made and not just accrued for that year.

Q3. What is the new rule for MSME payment?

Ans. If a written agreement exists, the buyer must pay within the agreed date or 45 days from the purchase date, whichever is sooner. If there is no agreement between the buyer and the MSME seller, the buyer must pay within 15 days.

Q4. What is liability under 43B?

Ans. Section 43B requires that expenses, including taxes, duties, and employee contributions, must be paid before the due date of filing the income tax return. Any provision for unpaid expenses at year-end will only be deductible if the payments are made within the prescribed time frame.