TP Ostwal, Tax Expert, strikes a word of caution. He says: “I would take a view that if the interest liability is already provided, which is penal in nature, why should there be a disallowance if the taxpayer makes the payment before filing his tax return to the MSME? This is a good provision introduced with a view to protect the interest of MSMEs, but if there are provisions in the law, disallowing payments made after 45 days and imposing 35% tax even if the payment before the year-end make mean people instead of buying from MSMEs, will find alternate sources like an unregistered MSME or a large supplier because then there will be no question of disallowance of payment and additional tax.”
What is the new process? How will this change life for MSMEs? And how will this change life for big companies?TP Ostwal: The law was amended in 2023, February 1st and became effective last accounting year, which is relevant to the assessment year which starts from today. 1st April FY 24-25. Those who have already done the transactions and defaulted in making payment to the MSMEs, will be still covered by the provisions. Now, the question is what the government wanted. They started a law that MSMEs are suffering from the payment cash flow and therefore they said all their payments must be made within 45 days.
In case payment is not made within 45 days, then those not paying will suffer disallowance. However, a leeway was given, if you make the payment before the year end, then the payment will be allowed. There is a provision for payment of interest in such a situation. In case you are delayed beyond 45 days, you are required to pay interest to MSME, that is understandable, because these are penal consequences which have been built in MSME law.
Now MSMEs which are registered are required to be governed by these provisions, though there are so many MSMEs which are not even registered and therefore the issue arises is whether they are also covered or not. Now, take a situation If you are buying something from MSME, say a crore of rupees, in which the MSME has made a profit of Rs 10 lakh. So, your total payment of Rs 90 lakh was for the cost, plus Rs 10 lakh was their profit. A total of 10,00,000 for the total purchases. If you have defaulted and not paid it before the year end, the whole amount will be disallowed and that will be allowed in the year in which you make a payment. And if it is disallowed, you will be slapped with a liability of 35% tax.
We are trying to make it simple so that everyone understands. Would you like to add something to that?
TP Ostwal: No, what you say is correct. There is a 45-day statutory period within which the transaction should be squared off. You must make a payment. However, if you do not make the payment within 45 days, you will have the liability of interest, which is three times the normal rate of interest. Now the question arises if you have still made the payment to that MSME prior to the year end with no disallowances in your hands, it will be allowed.
But interest will not be waived. Interest is chargeable. MSME will be entitled to charge it from the person who has defaulted the payment. Now that is one most important factor. Second factor is that by the year-end, you are required to clear it. If you have not cleared the payment before the year end, that 45 days are over and still not clear, this disallowance under the Income Tax Act gets triggered for the person who has purchased something from MSME. Therefore, he will suffer a huge additional cost, that is, disallowance.
Most of the statutory payments are subject to disallowances if you do not make the payment before the year end or before filing your tax return. But in the case of MSME, this disallowance, before filing tax return even if you have paid, it will not be allowed, it will be still disallowed and this will be allowed in the next year which is an exception to the normal rule which they have created for all other statutory payments and therefore to that extent is more draconian.
I would take a view that if the interest liability is already provided, which is penal in nature, why should there be a disallowance if the taxpayer makes the payment before filing his tax return to the MSME and therefore, I would take a view that this is a good provision introduced with a view to protect the interest of MSME, but the hiccups created to the payer because suppose you are creating such a provision in the law, people instead of buying from MSMEs, will find alternate sources like an unregistered MSME or a large supplier because then there is no question of disallowance of my payment and additional tax of 35% on me.
