How Section 43B of Income Tax Act Benefits MSMEs

Clause (h) under Section 43B of the Income Tax Act introduces a vital compliance requirement, favouring MSMEs by ensuring timely payments from their buyers. Given that the MSME sector contributes over 30% to India’s GDP , it becomes even more crucial for business owners to understand how the clauses under the provision support working capital stability. This blog explores Section 43B’s key provisions and the advantages that follow. Read on!

Benefits for MSMEs Under Income Tax 43B Section

Like other taxpayers, MSMEs can benefit from deductions on the many expenses covered under the provision. But unlike other clauses of Section 43B, clause (h) only allows deductions on payments to micro and small enterprises (MSEs) if they fall within a much shorter time frame.

The structure of Section 43B(h) acknowledges that MSMEs are more likely to suffer from delayed payments and addresses this issue directly; this, in turn, provides a range of additional benefits for MSMEs:

Smooth Payment Cycles and Improved Liquidity

The most immediate benefit is the direct improvement in business liquidity due to timely payments. When payments are timed to a set number of days, working capital is no longer trapped in long-pending receivables. This frees up funds for essential operational needs, such as paying suppliers, covering salaries on time, and meeting rent or utility obligations without stress. It transforms an MSME's cash flow from unpredictable to reliable.

Reduced Dependency on Short-term Borrowing

With a steady and predictable cash inflow, the need to rely on short-term credit facilities, such as overdrafts or quick loans, is significantly reduced. This is a significant financial win, as MSME entrepreneurs can save substantial amounts on interest payments that would otherwise erode their profits. Instead of servicing debt, that capital can be channelled back into business for growth, innovation, or building an emergency fund.

Also Read: Income Tax Notice to Salaried Employees: A Complete Guide

Enables Confident Operational and Strategic Planning

Predictable payment cycles empower MSMEs to move from reactive financial management to proactive strategic planning. This stability allows entrepreneurs to plan for inventory purchases, launch marketing campaigns, invest in new technology, or hire talent without the constant worry of cash shortfalls. It enables business owners to focus on growth instead of worrying about delayed payments.

Stronger Eligibility for an MSME Loan

When an entrepreneur approaches a lender for an MSME Loan, one of the first things they assess is repayment capacity, which is directly linked to cash flow stability.

Bank statements showing timely payment of statutory expenses (taxes, PF, ESI, and loan interest) as required under Section 43B of the Income Tax Act demonstrate financial discipline and compliance. Regular incoming payments, facilitated by Section 43B(h), further help portray a healthy, low-risk business. This can potentially lead to faster loan approvals, higher loan amounts, and more favourable interest rates.

Also Read: How to Save Income Tax in New Tax Regime?

Understanding Section 43B

Section 43B of the Income Tax Act specifies the expenses allowed as deductions under the heading ‘Income from business and profession'. It states that certain business expenses are deductible only in the year they are actually paid, not when the liability is incurred.

It means that expenses such as GST, PF contributions, interest paid on loans, and employee bonuses can be claimed as tax deductions for a financial year only if they are actually paid on or before the due date for filing the ITR for that year.

Section 43B(h) of Income Tax Act: Payments to MSMEs

The addition of clause (h) under the section has introduced a specification regarding payments to Micro and Small Enterprises (MSEs). It was introduced by the Finance Act, 2023, and benefits such enterprises.

The clause reinforces Section 15 of the Micro, Small and Medium Enterprises Development Act (MSMED), which mentions payment deadlines for business enterprises to pay micro and small enterprises:

• Presence of a written agreement: payment within 45 days

• No written agreement: payment within 15 days

According to Section 43Bh of Income Tax Act, if a buyer fails to make their owed payment to the Micro or Small Enterprise within the agreed period, the buyer cannot claim the expense as a tax deduction from their income for that year. The claim shall be allowed only in the same financial year in which the sum payable is actually made, incentivising timely payments to claim deductions and avoid an additional tax liability.

Also Read: A Guide to Basic Concepts of Income Tax

To Conclude

Section 43B of the Income Tax Act creates a clear legal framework for timely payments and furthers benefits to MSMEs. This reduces the stress of delayed payments and enhances options for business growth.

If you’re looking to utilise these compliance practices to secure funding, Poonawalla Fincorp offers MSME Loans,  where a strong payment record can enhance your approval prospects.

Frequently Asked Questions

What is Section 43B(h) of Income Tax Act?

Section 43B(h) states that payments to MSEs must be made within 45 days to qualify for tax deductions, regardless of the accounting method used. Section 43B(h) constitutes a legislative change designed to streamline payment processes to MSEs.

What is Section 43B H disallowance in income tax?

Section 43B(h) is a provision in the Indian Income Tax Act that disallows a tax deduction for payments owed to registered Micro and Small Enterprises (MSEs) if they are not paid within the time frame specified by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

What are the payment timelines under Section 43B(h)?

Section 43B(h) refers to the timelines under Section 15 of the MSMED Act, 2006, which mandates payment within 15 days from the date of acceptance of goods or services, unless a written agreement is in place. If a written contract exists, the timeline can be extended up to a maximum of 45 days.

How do delayed payments impact the buyer's taxes?

If a buyer pays an MSME after the deadline, the expense is "disallowed" for tax deduction purposes in that financial year. For example, if a payment for a March invoice is made in April (the next financial year), the buyer's taxable income for the previous year increases, leading to a higher tax liability. The tax deduction can only be claimed in the year following the payment.

Who qualifies as an MSME under this section?

This protection applies specifically to businesses registered as “micro” or “small” enterprises with a valid Udyam Registration number. The classification is based on the combined criteria of investment in plant & machinery and annual turnover, as defined under the MSMED Act, 2006. MSME registration enhances the credibility of businesses in the eyes of suppliers and buyers.

Does Section 43B apply to medium enterprises?

No, the specific provisions of Section 43B (h) of the Income Tax Act do not extend to medium enterprises. The focus is on safeguarding the financial health of the most vulnerable businesses in the supply chain, which are typically micro and small enterprises that face the most significant challenges with cash flow. Section 43B(h) applies to all businesses and entities making payments to MSEs for goods or services.

How can prompt payment records help in MSME Loan approval?

Lenders assess risk by analysing your business’s cash flow. A consistent record of timely payments demonstrates a reliable revenue stream and strong customer relationships. This reduces the lender’s perceived risk, making your business a more creditworthy candidate and improving your chances of securing an MSME Loan on favourable terms.

How can you check MSME registration status?

You can easily verify MSME registration status by visiting the official Udyam Registration Portal. There, you'll see an option to 'Verify Udyam Registration Number'; enter the Udyam Registration Number obtained by the business. Entering the URN will validate the certificate and confirm if the enterprise is micro, small, or medium.

What are the application criteria for Section 43Bh of Income Tax?

For Section 43B(h), the payment in question must have been made to a micro or small enterprise registered under the Micro and Small Enterprises Development Act, 2006 (this can be confirmed via Udyam registration). This clause does not apply to wholesale and retail traders, who are entitled only to Priority Sector Lending benefits, and medium enterprises.