Section 43B(h) Income Tax Act Repercussions: Kerala Textile and Garments Dealers Welfare Association asks MSEs to change Category

The Textile Dealers in Kerala has requested MSEs to change their category to avoid the trade-cycle tax-deduction issue brought forth by Section 43B(h) IT Act amendment
Income Tax - Kerala Textile and Garments Association - KTGDA - Tax implications for MSME - MSME category change - taxscan

The Kerala Textile and Garments Dealers Welfare Association ( KTGDA ) has requested micro and small enterprises ( MSEs ) in the textile industry to change their MSME category from “manufacturing” to “trading” with immediate effect. This request comes after the introduction of a new clause in the Income Tax Act, which requires businesses to make payments to suppliers within 45 days, namely Section 43B(h).

The KTGDA says that most of its member retailers cannot make payments within 45 days, and that they are considering returning all goods for which payments cannot be made under the new provision. The association also says that its members are planning to stop further purchases from MSEs that do not change their category.

The KTGDA acknowledges that the new amendment was introduced in response to demands from MSME suppliers, but they believe that it will damage the trust-based relationship between businesses. They have requested MSEs to cooperate with their request in order to avoid harming the industry.

Section 43B plays a pivotal role in determining the allowability of deductions on an actual payment basis. It outlines specific conditions under which expenses can be deducted when calculating income from business or profession.

Notably, this section does not apply to sums paid on or before the due date for filing income tax returns under section 139(1). The newly added clause (h) specifies that any sum payable by the assessee to a micro or small enterprise beyond the time limit set in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, is eligible for deduction.

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This deduction is applicable in the previous year when the sum is actually paid. This section essentially states that any sum payable by a larger enterprise to a registered MSME, beyond the stipulated deadlines, won’t be considered a deductible expense in the year the liability was incurred.

Read More: Timely Payments to MSMEs: Decoding Section 43B(h) of Income Tax Act

The deduction can only be claimed in the year the payment is actually made. MSEs are defined based on investment in Plant and Machinery or Equipment and Annual Turnover thresholds. Investment in plant and machinery and turnover subject to 1/5 crore respectively for micro enterprises and 10/50 crore for small enterprises.

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