A ticking tax time bomb threatens businesses under the newly unveiled Section 43B(h) of the Income Tax Act (introduced by Union Budget 2023). Delaying payments to Micro and Small Enterprises (MSEs) past March 31st can trigger hefty tax penalties. Act now to prioritize timely payments and avoid financial nightmares.
Timely payments crucial: The crux lies in adhering to strict payment timelines. Claiming deductions for MSE purchases requires settling dues within the agreed credit period (capped at 45 days). For instance, if you agree to pay a supplier within 30 days after delivery, missing that deadline jeopardizes the deduction. A 15-day default window applies if no agreement exists. Exceeding these deadlines comes with a steep price.
Delayed payments add to taxable income: Imagine this: an outstanding Rs 1 crore to an MSE by March 31st can inflate your taxable income by the same amount, potentially leading to a whopping Rs 35 lakh tax liability!
Who are the MSEs? Simply put, Micro and Small Enterprises (MSEs) are defined by their investment and turnover:
Micro Enterprise: Investment in plant and machinery up to Rs 1 crore, turnover up to Rs 5 crore.
Small Enterprise: Investment in plant and machinery up to Rs 10 crore, turnover up to Rs 50 crore.
Surat’s Vibrant Network: This provision holds particular significance for Surat, a thriving hub for MSEs in various sectors like weaving, embroidery, knitting, garment, digital printing, CA firms, and saree box manufacturers. According to a FOSTTA report, over 65,000 power looms, 400 embroidery units, and 150 printing units in Surat fall under this category.
Time is of the essence: There’s still room for maneuver. Payments made within 45 days of the financial year-end qualify for deductions in the same year. However, delays beyond this period push the deduction claim to the year of payment, offering a delayed benefit at best.
Scrutiny ensures compliance: Don’t think you can go unnoticed. During audits, cross-verification by the Income Tax Department can reveal delinquent payments, potentially leading to further income additions and tax implications. Do you want to risk that?
Act now, pay today: This provision has been in effect since April 1, 2023. Proactive businesses will strategize and implement efficient payment systems to comply with the Act and avoid hefty tax burdens. Don’t delay, pay today!
Illustrations:
Scenario 1: Delayed payment of Rs 50 lakh to a micro enterprise by March 31st, 2024, results in a Rs 65 lakh tax liability, highlighting the financial repercussions of missed deadlines.
Scenario 2: Services worth Rs 20 lakh unpaid to a small enterprise beyond the stipulated timeframe and financial year-end can attract a Rs 26 lakh tax liability, emphasizing the importance of prompt payments.
Scenario 3: Settling a Rs 30 lakh debt with a medium enterprise within 45 days, even after the year-end, avoids any tax or interest hassle, as the provision doesn’t apply to medium enterprises.
Remember, timely payments to MSEs are no longer just a good business practice; they’re a fiscal imperative. Prioritize the small giants and steer clear of potential tax nightmares.
Disclaimer: The views and opinions expressed in the article by Dilip Patil, Managing Director of Samarth SSK Ltd., are solely his own.
