In the Income Tax Act, a recent amendment aimed at encouraging timely payments to small businesses inadvertently may have deterred buyers from engaging with them. Sources within the government suggest that a potential amendment to rectify this issue could be introduced during the upcoming FY25 full budget session in July.
The proposed amendment is still shrouded in uncertainty. One suggestion is to eliminate Clause H of Section 43B, although additional sources caution against making premature assumptions about the specifics of the forthcoming revisions, calling for clarity.
Introduced under the Finance Act of 2023, Clause H in Section 43B of the Income Tax Act was intended to alleviate liquidity challenges faced by MSMEs. This clause allowed late payments to small businesses to be accounted for as expenditure in the fiscal year of the actual transaction rather than when the obligation arises.
Despite its noble intentions, concerns have arisen among small businesses regarding the unintended repercussions. There’s a fear that larger buyers may avoid dealing with small firms to circumvent this provision. Adjustments are expected to address such concerns in the Finance Bill scheduled for presentation during the FY25 full-year budget.
Tax experts argue for the reduction of this provision, stating that the Income Tax Act should primarily serve financial objectives rather than expanding social agendas. They also highlight potential ramifications for buyers of MSME goods and services, such as increased tax obligations and potential profit decreases upon eventual payment.
According to the Micro, Small, and Medium Enterprises Development (MSMED) Act, timely payments are defined as within 15 days, extendable to 45 days under contractual agreements. However, in some industries, payment cycles often exceed these timelines, ranging from 3 to 6 months.
Finance Minister Nirmala Sitharaman has acknowledged the concerns raised by small businesses and has initiated a comprehensive review through the finance ministry to ensure compliance with payment cycles by central public sector undertakings. Challenges in MSME monitoring dues from state PSUs and the private sector have prompted the solicitation of recommendations.
The 2023 Income Tax modification aimed to incentivize timely payments, citing instances where businesses exploit fiscal advantages while disregarding payment deadlines, as highlighted by FM Sitharaman. While the minister refrains MSME from disclosing the government’s plans for the full budget, sources indicate an intent to address unintended consequences in the upcoming Finance Bill.
Unlike for late payments such as taxes and loan interest, the existing provision lacks leniency for late payments to small businesses, exacerbating their financial challenges.
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