Starting from the year 2024-25, there’s a new rule for companies. They must pay any pending bills to small businesses within 45 days. If they don’t, they’ll have to pay more tax for the years 2023-24. This is because they can only claim deductions for payments they make in that year. Companies need to follow this rule to avoid extra taxes.
Udyam Registration is an online registration process established by the Indian government to simplify the registration of MSMEs. It replaces the previous systems of EM-I/II and Udyog Aadhaar Memorandum (UAM). The primary objective of Udyam Registration is to provide MSMEs with a streamlined process to avail themselves of various benefits and incentives offered by the government. These benefits include easier access to credit, subsidies, & exemptions under different schemes.
Understanding the Latest Tax Compliance Guidelines: Section 43B Explained
In India, businesses usually record expenses when they happen (accrual basis), even if they haven’t paid for them yet. However, Section 15 of the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, and newly enacted Section 43B(h) of the Income-tax Act says that businesses must pay these MSME Registered Enterprises within 15 days, or up to 45 days if they have an agreement.
Starting from April 1, 2024, new tax laws in India require all types of businesses, like companies, sole proprietorships, partnerships, or LLPs, to pay their suppliers registered as MSMEs within 15 days, or up to 45 days if they have an agreement.
So, if a company owes money to a small MSME Registered Enterprise for more than 45 days by March 31, 2024, and pays after April 1, 2024, they can only count it as an expense in the financial year 2024-25, not 2023-24. This means companies might have to change how they manage their money and make deals.
As per Section 15 of the MSMED Act, 2006, and Section 43B(h) of the Income-tax Act, 1961 says that businesses must pay for the goods or services purchased from businesses registered under MSME as follows
| Sl No. | Contract Details | Where Supplier is registered under MSMEs | Where Supplier is not registered under MSMEs | |||
|---|---|---|---|---|---|---|
| 1 | Contract mentions 15 days as credit periods | Within 15 Days | Not Applicable | |||
| 2 | Contract Does not mention any credit periods | immediate | Not Applicable | |||
| 3 | Contract mention 45 days as credit periods | Within 45 Days | Not Applicable | |||
| 4 | Contract mention 46 days as credit periods | Within 46 Days | Not Applicable | |||
Failure to comply with this regulation will result in businesses being unable to deduct these payments as expenses in the same fiscal year they are incurred. Instead, they can only deduct them in the year they actually make the payments. Put differently, these expenses cannot be claimed on an accrual basis but must be claimed on a payment basis. This could lead to an increase in taxable income and subsequently higher business taxes. Businesses are concerned about this as it may necessitate them to pay more taxes in the fiscal year 2024-25.
Penalty for Non-Compliance with Payment Timeframe as per Section 43B(h)
In the event of delayed payment to an MSME registered entity, the payer will be liable to pay interest on the outstanding amount, calculated at the bank rate notified by the Reserve Bank of India (RBI) for the period from the due date or as per the agreement terms, whichever is applicable.
Furthermore, it’s important to note that the deduction of this interest will not be permitted as an expense under any section, as per the provisions of the Income-Tax Act (ITA), 1961.Impact on Udyam Registered Units
Impact on Udyam Registered Units The Udyam Registration certificate provides Small and Medium Enterprises (SMEs) with a range of advantages, such as access to government schemes, subsidies, and incentives. The introduction of Section 43B(h) adds another advantage to MSMEs’ arsenal. The following benefits will be realized by MSME Units:
- Decreased Disputes Regarding Payments
- Enhanced Cashflow Management
- Improved Planning Certainty
- Strengthened Bargaining Position
- Ensuring Compliance and Managing Risks
To comply with Section 43B(h), Udyam registered units must give utmost priority to paying their supplier dues on time. This entails maintaining detailed records of these payments and ensuring they are settled within the specified deadlines.
Optimizing benefits through adherence
Although meeting the requirements of Section 43B(h) may appear challenging, Udyam registered units can leverage it as an opportunity to strengthen their financial management capabilities. By maintaining precise records and meeting payment deadlines, SMEs can showcase their dedication to transparency and responsibility. This, in turn, enhances their credibility with stakeholders, including lenders, investors, and government entities.
Navigating Obstacles and Seeking Assistance
Despite diligent efforts, Udyam registered units may face hurdles in complying with Section 43B(h). These challenges might encompass cash flow limitations or complexities in grasping tax guidelines. In such situations, SMEs should actively seek support from industry associations, professional networks, and governmental bodies that offer advisory services. Collaborating with peers and exchanging best practices can also yield valuable insights for overcoming common compliance obstacles.
Establishing Trust and Esteem
Compliance with Section 43B(h) not only ensures adherence to legal mandates but also plays a vital role in fostering trust and building reputation for Udyam registered units. Timely settlement of supplier and statutory obligations reflects positively on the credibility and dependability of SMEs, nurturing trust among clients, suppliers, and other business partners.
Continuous Assessment and Enhancement
Achieving and sustaining compliance with Section 43B(h) requires ongoing commitment from Udyam registered units. It necessitates continuous evaluation of financial procedures, vigilant monitoring of regulatory shifts, and proactive adjustments to align with evolving tax standards. SMEs should establish robust internal controls and mechanisms for regular audits to detect potential areas of non-compliance and address them promptly.