The Finance Act 2023 inserted Section 43B(h), which stipulates that any money owed by any company to Micro and Small enterprises for goods or services supplied may be deducted only in the same year if it is paid within 45 days to the MSMEs.

The section disallows businesses from claiming deductions for expenses incurred towards goods or services purchased from MSMEs if the payment is delayed beyond 45 days. In simpler terms, if you don't pay an MSME on time, you can't deduct that expense from your taxable income, potentially increasing your tax liability. This section considers the unpaid dues as the buyer’s profit, hence taxable.

The purpose of this section was to ensure that the MSMEs get timely payments and don’t face cash crisis. But this section has brought new challenges to the small businesses.

The big businesses or the buyers are now making purchases from the unregistered small businesses to avoid paying within 45 days. The business has started to flow from the registered entities to the unregistered ones because that allows the buyer to avoid the payment deadline. Hence registered MSMEs are suffering rather being benefitted from the provision.

Definition of MSMEs

As the the MSME Act 2006, Micro Enterprises, means an entity having an investment in plant & machinery not exceeding 1 Crore and turnover not exceeding 5 Crores. Small Enterprises, on the other hand, should invest in plant & machinery not exceeding 10 Crores and turnover not exceeding 50 Crores. 

Read about MSME's ECLGS Scheme