MSME 15/45 days payment rules applicability
Case-1
If a businessmen who is filing his Income Tax Return (ITR) u/s 44AD of Income Tax Act, 1961 and declaring presumptive profit @6% or 8% of his turnover as per the case, then the businessmen should not worry about this 15/45 days payment rule and he can make payment to his supplier even after 45 days as well and there would be no disallowances.
Case-2
If a businessmen who is not filing his ITR under section 44AD of Income Tax Act,1961 then he have to follow this MSME rules of 15/45 days payment. and he need to clear his dues within time. 45 days rule apply only when both parties have entered into agreement of payment term of 45 days or supplier have mentioned payment terms & condition on Invoices and in case of no agreement exist between both parties then 15 days rule would apply.
Conditions of payment
This MSME Rule would be applicable only if you have purchased goods/services from Manufacturer/Service Provider who have registered themself as MSME Micro & Small Enterprises. If you have purchased goods from a person who is registered as Traders in MSME, then this payment rule 15/45 days would not be applicable while payment to them.
Three Categories of businesses are defined in MSME on 01-07-2020, Micro Enterprises:-
If Turnover(Sales) is less than Rs.5 Crores and Investment in Plant & Machinary is upto Rs.1 Crore.
Small Enterprises:-
If Turnover(Sales) is less than Rs.50 Crores and Investment in Plant & Machinary is upto Rs.10 Crore.
Medium Enterprises:–
If Turnover(Sales) is less than Rs.250 Crores and Investment in Plant & Machinary is upto Rs.50 Crore.
Consequences of non payment within 15/45 days:-
As per Section 43b(h) of IT Act, 1961 if payment is not made within 15/45 days then it would be allowed as deduction in the year of payment only, means expenses of purchase of goods/services would be disallowed in the year it is incurred and would be allowed in the year of payment only.
Example-1
If Mr. A Purchased goods from a Manufacturer Mr. B( Micro MSME Registration holder) of Rs.5 Lakhs on 16-03-2024 and since no agreement exist between parties for payment then Mr. A have to make payment within 15 days i.e. within 31-03-2024, so if Mr. A failed to make payment within time and now makes payment on 10-04-2024 then in the Financial Year 2023-24, this Rs.5 Lakhs would be added to his Income and Mr. A would be liable to pay tax on this income as well.
Example-2
If Mr. A Purchased goods from a Manufacturer Mr. B( Micro Enterprises) of Rs.5 Lakhs on 16-03-2024 and Mr. A have to make payment within 15 days i.e. within 31-03-2024, so if Mr. A paid Rs.1 lakhs before 31-03-2024 and failed to make balance of Rs.4 Lakhs within 31-03-2024 and now on 10-04-2024 makes balance payment of Rs.4 Lakhs, then in the Financial Year 2023-24 this Rs.4 Lakhs would be added to his Income and Mr. A would be liable to pay tax on this additional income of Rs. 4 Lakhs as well.
How to Know whether a supplier is registered in MSME or not
You have to get confirmation from the supplier over email or through letter to know his status in MSME Registration. Contact all the suppliers/service providers whose balances are not paid and tell them to send their MSME Registration number or MSME Registration Certificate.
If some suppliers says that he has not registered on MSME, then still a written declaration is needed from them on email or letter mentioning that he has not registered on MSME.
Conclusion;-
Since this section is applicable for FY 2023-24, so everyone should calculate their outstanding balances of suppliers and should start making payment to Micro/Small Enterprises. Since reporting of this section is done by your Auditor, Chartered Accountants (CA) so you can not hide these transactions. their is no way to bypass this rule so every businessmen should do efforts to reduce their outsandings so that they can save Income Tax Liability.
This blog is written for educational purpose only.
Author
CA Shobhit Kesharwani