Tuesday, February 6, 2024

Timely Payments to MSEs for Tax Benefits

Guide to Supporting MSEs Through Fiscal Discipline

The introduction of the Finance Act of 2023 has brought about crucial amendments to Section 43B of the Income Tax Act, imposing new financial mandates on businesses in their dealings with micro and small enterprises (MSEs). These legislative adjustments are crafted to ensure the economic vitality of MSEs by enforcing prompt payment practices. As a consultant, this guide aims to dissect these amendments, outlining their core features, the implications for business operations, including the verification process, and providing strategic advice to navigate these changes efficiently.

Unpacking the Amendments to Section 43B

The Finance Act 2023 introduces several key measures aimed at enhancing the financial well-being of MSEs through improved payment timelines. The amendment's significant highlights include:

  • Expenses Disallowance for Late Payments: A pivotal change is the disallowance of deductions for any sum owed to an MSE that is not paid within the timeframe specified in Section 15 of the MSMED Act, 2006. This results in an increase in taxable income and, consequently, tax liability for businesses that delay payments beyond the stipulated period.

  • Focus on Micro and Small Enterprises: The amendment specifically caters to micro and small enterprises, thereby excluding medium-sized enterprises as per the MSMED Act's delineations.

  • Specified Payment Period: The MSMED Act mandates the settlement of dues to MSEs within 45 days of receiving goods or services, establishing a clear compliance benchmark.

  • Applicability from Assessment Year 2024-25: These legislative changes will be in effect from the Assessment Year 2024-25, correlating with the Financial Year 2023-24, allowing businesses a timeframe to adjust their operational practices.

  • Inclusion of Non-Registered MSEs: For the purposes of this amendment, MSEs that have not obtained MSME registration but have declared their status in writing are also considered, easing the compliance burden.

Operational Implications and Strategic Adaptations

In light of the amendment, businesses are urged to undertake the following strategic adjustments:

  1. Revise Payment Mechanisms: It is essential for businesses to critically evaluate and amend their payment procedures to ensure that all payments to MSEs are completed within the 45-day window to mitigate the risk of increased tax liabilities.

  2. Adjust Accounting Methods: Finance teams must shift their accounting approach to recognize expenses based on actual payment rather than accrual, specifically in transactions involving MSEs, to reflect the tax implications accurately.

  3. Seek Expert Guidance: Engaging with financial and legal consultants is crucial for a thorough understanding of the amendment and for integrating compliant financial operations.

  4. Promote Supplier Engagement: Establishing clear communication channels with MSE suppliers regarding payment schedules can preempt compliance issues and strengthen business relationships.

Compliance Through MSE Status Verification

Ensuring adherence to the amendment necessitates a diligent approach to verifying the MSE status of suppliers:

  1. Collecting MSE Information: Beginning with the collection of the MSME registration number or a declaration of MSE status from suppliers is critical for compliance.

  2. Official Verification Mechanism: The MSME verification portal (https://udyamregistration.gov.in/udyam_verify.aspx) is the designated platform for authenticating a supplier's MSE status, ensuring that payments are made in accordance with the amended tax provisions.

  3. Documentation for Audits: Keeping meticulous records of the MSE verification process is indispensable for audit preparedness and for resolving potential discrepancies.

  4. Routine Vendor Assessment: Incorporating MSE status checks into standard vendor management procedures ensures ongoing adherence to the Section 43B amendments.


The amendments to Section 43B by the Finance Act of 2023 signal a significant shift towards ensuring the financial security of MSEs through disciplined payment practices. Businesses must adapt their operational, accounting, and verification processes to comply with these new requirements, thereby supporting the sustainability of MSEs. As we guide through these legislative modifications, it is crucial to view these adaptations not just as compliance obligations but as opportunities to foster a more robust and supportive ecosystem for micro and small enterprises.

Disclaimer: The insights and recommendations provided in this guide are based on the interpretation of the Finance Act of 2023 and its amendments to Section 43B of the Income Tax Act as understood at the time of writing. This document is intended for informational purposes only and should not be considered legal advice. Businesses should consult with professional advisors to understand how these changes may specifically impact their operations.