Supporting Small Businesses Through Taxes: Exploring the Benefits of Section 43B(h) of the Income Tax Act

India’s Micro, Small and Medium Enterprises (MSMEs) form the backbone of the economy, providing millions of jobs and contributing significantly to the GDP. In recognition of their importance, the government has implemented various policies and incentives, including a unique provision in the Income Tax Act – Section 43B(h). Today, we’ll delve into this section and explore how it benefits both MSMEs and larger enterprises.

Understanding Section 43B(h):

This section essentially states that any sum payable by a larger enterprise to a registered MSME, beyond the stipulated deadlines, won’t be considered a deductible expense in the year the liability was incurred. The deduction can only be claimed in the year the payment is actually made. Simply put, late payments to MSMEs turn into taxable income for the larger enterprise.

Benefits for MSMEs:

• Faster Payment Cycle: Section 43B(h) incentivizes large companies to settle dues with MSMEs within the specified timeframe (15 days without a written agreement and 45 days with an agreement). This ensures timely cash flow for MSMEs, crucial for their sustainability and growth.
• Improved Bargaining Power: This provision strengthens the bargaining power of MSMEs when negotiating payment terms with larger entities. They can now confidently push for deadlines aligned with the stipulated timeframe, knowing the consequences of delayed payments.
• Reduced Disputes: Timely payments minimize potential disputes and legal wrangles over outstanding dues, saving time and resources for both MSMEs and larger businesses.

Benefits for Larger Enterprises:

• Tax Planning: By adhering to the stipulated timelines, larger enterprises can claim deductions for payments made to MSMEs in the same year, resulting in reduced tax liabilities.
• Compliance and Transparency: Section 43B(h) encourages transparent financial practices and adherence to regulations, promoting a responsible business environment.
• Strengthening MSME Ecosystem: Prompt payments to MSMEs contribute to a healthy MSME ecosystem, ultimately benefiting larger businesses through a robust supply chain and access to diverse resources.

Moving Forward:

Section 43B(h) is a positive step towards promoting a fair and mutually beneficial environment for MSMEs and larger enterprises. While awareness about this provision needs to be further increased, its effective implementation holds immense potential for boosting the MSME sector and contributing to India’s economic growth.

(The author is Naveen Panwar, and the views expressed in this article are his own)