Delay in payment to MSME ? Income tax will not allow the expenditure

24 March 2023

What is the change?

Budget 2023 has proposed an amendment under Income Tax Act, to allow deduction of purchases / expenses only if payments are made to MSME supplier within the limit specified under section 15 of MSMED Act, 2006

What does than mean?

It means, deduction of expense / purchase can not be claimed until payment is made to MSME supplier.

When are the changes applicable?

Applicable from 1st April 2024 and will apply for Assessment Year 2024-25 (FY 2023-24) and subsequent years.

What is the time limit specified under section 15 of MSME Act?

If agreement is made with MSME supplier – Maximum 45 days

If no agreement with MSME supplier – 15 days from the date of purchase / delivery of goods / services

What steps to be taken by taxpayer to enusre complaince is being done?

Step 1 – Identify the MSME supplier by taking declaration and MSME certificate.

Step 2 – If any accounting software is used, mark the supplier as MSME in the software from whom the declaration is received.

Step 3 – Wherever possible an agreement should be made with MSME supplier specifying due date for payment which can not exceed 45 days.

What if payment is not made within the due date? Does it mean it is permanently disallowed?

No, as discussed above dedcution of expenses will be allowed when payment is made. Hence it is not a permanent disallowance. Hence if buyers take an invoice from an MSME, they will have to actually make the payment to the MSME in order to take a deduction in the income tax for that particular expenditure. Otherwise, it will be added to their income. This is a very dangerous provision for defaulters. Others should not have to worry.

Example

 

Invoice Date

Due date as per agreement Due date as per MSMED Act, 2006 (max 45 days if agreement, 15 days – if no agreement) Date of Actual payment Deduction Allowed in FY

Explanation

04-Feb-2024

20-Mar-2024 20-Mar-2024 25-Mar-2024 2023-2024

Agreement –45 days

04-Feb-2024

20-Mar-2024 20-Mar-2024 07-Apr-2024 2024-2025

Agreement – 45 days

04-Feb-2024

07-Apr-2024 20-Mar-2024 25-Mar-2024 2023-2024

Even though agreement is for more than 45 days, Due date as per MSME is max 45 days.

04-Feb-2024 07-Apr-2024 20-Mar-2024 02-Apr-2024 2024-2025 Deduction allowed when actual payment is made.

04-Mar-2024

No Agreement 18-Mar-2024 31-Mar-2024 2023-2024

No agreement, hence due date is 15 days as per MSME Act.

04-Mar-2024

No Agreement 18-Mar-2024 04-Apr-2024 2024-2025

Since payment is made in FY 2024-25, deduction will be allowed in FY 2024-25 only.

18-Mar-2024

18-Apr-2024 02-Apr-2024 07-Apr-2024 2023-2024 Since payment is made within the due date of agreement and agreement says max 45 days, deduction will be allowed on FY 2023-2024
18-Mar-2024 18-Apr-2024 02-Apr-2024 19-Apr-2024 2024-2025

Since due date was 18-Apr-2024 as agreement was made and payment was done after due date, deduction will not be allowed in FY 2023-2024.

18-Mar-2024

No Agreement

02-Apr-2024

01-Apr-2024 2023-2024

Since payment is made within the due date of MSME Act, purchase done in FY 2023-24 will be allowed in that year.

18-Mar-2024 No agreement 02-Apr-2024 05-Apr-2024 2024-2025

Payment made after due date as per MSME, hence allowed in FY 2024-2025

 

March

09

2023

Attention all taxpayers in India! Just a friendly reminder that the due date for the last installment of advance tax is approaching. If you're having an estimated tax liability of Rs. 10,000 or more, ...