New Delhi, Apr 22 (KNN) The central government is likely to amend the Income Tax Act again in the upcoming full budget for 2024-25 to address concerns that a recent change aimed at helping small businesses has ended up discouraging buyers from procuring goods and services from them.

Last year, a new clause (Clause H) was added to Section 43B of the Income Tax Act to improve liquidity for Micro, Small and Medium Enterprises (MSMEs), reported Mint.

It stipulated that if payments to small businesses are delayed beyond a specified period, the buyer can claim that expense as a deduction only in the fiscal year when the payment is actually made, not the year when the liability arose.

However, there are apprehensions that large buyers may now avoid sourcing from small firms altogether to avoid this tax provision, according to sources aware of discussions within the government.

“It is highly likely that Clause H of Section 43B may be dropped,” said one source on condition of anonymity. The exact amendments are still being worked out.

Ved Jain, a tax expert and former president of the Institute of Chartered Accountants of India (ICAI), strongly advocated for removing the clause, arguing that the Income Tax Act should rarely be used for larger policy objectives that can be addressed through other laws.

Jain explained that the clause can lead to a spike in a buyer's tax liability for the year due to denial of deduction for payment liability accrued. And if the deduction is allowed later when payment is made, the earlier tax incidence does not reverse, potentially depressing profits that year.

The Micro, Small and Medium Enterprises Development (MSMED) Act defines timely payment as payment made within 15 days, or within 45 days if backed by a written contract. However, in many industries, the typical payment cycle far exceeds these timelines, often ranging from three to six months.

Finance Minister Nirmala Sitharaman acknowledged the concerns raised by MSMEs at a recent event. She said while the intent was to encourage timely payments, the “unintended consequences will be addressed” in the next Finance Bill after receiving suggestions from stakeholders.

The move is expected to provide relief to small businesses worried about losing customers due to the tax provision, even as the government aims to improve their financial liquidity through other measures.

(KNN Bureau)