Traders and tax practitioners want the finance ministry to review subsection ‘h’ to section 43B of the Income Tax Act amid apprehensions that the taxman may disallow certain deductions from business income.

Section 43B of the Income Tax Act provides certain expenses that can be claimed as deduction from business income in the year of actual payment.

A new subsection ‘h’ to 43B was included through the Finance Act 2023, which allows deduction from business income on actual payment of any sum by the assessee to micro or small enterprises (MSMEs) within the normal time limit of 15 days from the date of acceptance of supply or 45 days in case of any agreement between buyers and MSMEs.

This came into effect from April 1, 2024 and will apply from assessment year 2024-25 and subsequent years, according to the explanatory memorandum to the Finance Bill, 2023.

The Centre’s objective in introducing the subsection is to promote timely payments to micro and small enterprises. But the move seems to have caused reluctance to purchase from MSMEs on apprehensions of disallowance of deduction from business income.

If the deduction is disallowed on account of default on payment within the time limit of 45 days, the tax liability could increase to around 40 per cent, including interest and penalty, according to traders.

“Several businesses have larger credit periods than 45 days and this is creating division among businesses who can and those who cannot give credit of over 45 days,” Narendra Kapadia, director, Confederation of West Bengal Trade Associations, told The Telegraph.

The confederation in a statement said that traders are facing pressure on working finance on the same volume of business.

“The very purpose of section 43B(h), to provide benefit to MSMEs, is defeated when this will make purchase from them unviable for their buyers. The cancellation of order and also of MSME registration has already begun,” the statement said.

The confederation has called for the removal of the subsection h. “We find it not possible to wait further in the midst of the ongoing Lok Sabha Election days,” the statement said.

“The traders are facing difficulties and are reluctant to make purchases from micro and small enterprises in apprehension of disallowance of purchase amount remaining outstanding at year end that is 31st March,” said Narayan Jain, national president of the All India Federation of Tax Practitioners.

He added that there is a need to review the provision and relax the same by allowing payment made within due date of filing income tax returns.