23-May-2024 Controversy revolving around MSME Traders

Let’s face the knotty question revolving around the new MSME amendment.

“Whether the provisions of Section 43B(h) will apply to “TRADERS” registered under MSMED Act, 2006?”

As of now, the Income Tax Department has not come up with any express clarification regarding this ambiguity.

Let’s shed some light on the provisions of MSMED Act, 2006 and section 43B(h) of the Income Tax Act, 1961 and try to find the answer to this.

Meaning of enterprises under MSMED Act, 2006-

The definition of “Enterprises” under the said act, includes manufacturers/producers of goods and service providers. Traders have not been included in the meaning of enterprises under the MSMED Act, 2006. Let’s have a look at the definition below:- 

“Enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services.

Inclusion of Wholesale and Retail Trader under MSME.

As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated July 2, 2021, wholesale and retail traders are included in the MSME’s and are allowed to be registered on the Udyam registration Portal. However, benefits to such wholesale and retail trader MSMEs are restricted to Priority Sector Lending. 

Looking at the above provisions one can reach to the conclusion that the provision of section 43B(h) of The Income Tax Act, 1961 is not applicable to traders for the reason being that the traders are included in the MSME’s for priority sector lending only.

However, let’s analyze what section 43B(h) of The Income Tax Act, 1961 states:-

43B(h) - any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).

Having a close look at it, one will notice that 43B(h) refers to any sum payable to micro or small enterprise. Traders itself does not qualify in the definition of enterprise stated in the MSMED Act, 2006 and registration allowed to them in the said act is only for providing the benefit of the priority sector lending.

Referring to above it appears that section 43B(h) of The Income Tax Act, 1961 is not applicable to Traders.

Quick FAQ’s

1. 1) What if the supplier is engaged in both trading as well as manufacturing/services?

Answer:- In such a case, section 43B(h) of the Income Tax Act, 1961 will be applicable to the total dues outstanding to such supplier. 

1. 2)Will the GST component be disallowed if the sum payable to Micro and Small Enterprise attracts Section 43B(h) disallowance?

Answer: - If the sum payable to the Micro or Small Enterprise includes GST, the disallowance is restricted to the amount excluding GST if the GST is claimed as Input Tax Credit (ITC) in the books of accounts. However, if the buyer opts not to claim the input tax credit under GST and treats it as an expense in its Profit and Loss account, deduction against GST will only be allowed based on actual payment.

1. 3)Whether section 43B(h) of the Income Tax Act, 1961 is applicable to assessee opting for presumptive taxation under section 44AD/44ADA/ 44AE etc. ?

Answer: - Section 43B of the Income Tax Act, 1961 does not apply to assessee opting for presumptive taxation under section 44AD/44ADA/44AE etc. and hence there will be no disallowance under clause (h) of the said section.

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