New payment law to aid MSMEs impacts India's textile trade

“The amendment came into effect from current fiscal 2023-24. It means that income tax payers (business entities registered under Companies Act 2023) will have to face its repercussions in next assessing year 2024-25,” Kunal Mishra, a Chartered Accountant at a Mumbai based consulting firm Virtual CFO, said in an article posted on LinkedIn.

According to the post of Mishra, the amendment in the Finance Bill of 2023 has extended the government’s concerted efforts to enhance liquidity for MSME entities, Earlier, it had implemented various measures for the same. The amended section 43B(h) of the Income Tax Act is applicable to all types of purchases made from enterprises registered under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. However, it specifically applies to micro and small enterprises, excluding medium scale enterprises.

As per Section 43B(h), any sum payable by the assessee to a micro and small enterprise beyond the time limit specified in Section 15 of the MSMED Act shall be allowed only in computing the income of the previous year in which the sum has been actually paid. This is irrespective of the previous year in which the liability to pay the sum was incurred, as per the accounting method regularly employed.

The clause is applicable when an enterprise is buying goods or taking services from an enterprise registered under the MSMED Act, 2006. It is important to note that the registration of the buyer under the MSMED Act, 2006, is not mandatory. Micro enterprises, to be registered under the MSMED Act, 2006, must have an investment in plant and machinery not exceeding ₹1 crore and turnover not exceeding ₹5 crore. Small enterprises, on the other hand, should have an investment in plant and machinery not exceeding ₹10 crore and turnover not exceeding ₹50 crore.

According to the latest amendment, buyers (enterprises) are obligated to pay micro and small suppliers within 45 days, depending on the presence of a written agreement. In the absence of a written agreement, payment should be made within 15 days. If payments to micro and small enterprises are not made within the specified time frame, the amount becomes taxable income for the assessee in the previous year of non-payment. The assessee can claim a deduction in the previous year when the payment is made. Mishra advised that businesses should categorise suppliers in their books and adhere to payment deadlines.

As the last date of current fiscal 2023-24 is approaching fast, traders in textile and other sectors are worrying for implications of the clause. Ankur Bansal, a trader from Panipat, said that confusion regarding the payment clause is adding to the worries of the traders. They are avoiding buying any goods/service in the current fiscal as they will not be able to pay within the same fiscal year. As per clause, if a buyer places order and gets delivery of goods/service but it fails to pay within 45 days/15 days before March 31, 2024, the due payment will be added to his income for next assessing year 2024-25.

In order to remain on the right side of law, buyers are taking undertaking from their suppliers and vendors that they do not fall under the category of Micro, Small and Medium Enterprises as per the MSME Act 2006.

However, few traders feel that this will be a short-term pain, and trade will become normal in the next fiscal year. Traders/buyers will then be able to get delivery from their suppliers and would be able to make payment during the entire fiscal year till next March 2025.

Fibre2Fashion News Desk (KUL)