The Income Tax Department has introduced critical changes to Clause 22 of Form 3CD for the ongoing tax audit season, focusing on timely payments to MSMEs (Micro, Small, and Medium Enterprises). Business entities undergoing audit under Section 44AB must now report both timely and delayed payments to MSMEs, marking a major shift from earlier norms where only delayed payments were disclosed.
This change is tied to the stricter implementation of Section 43B(h), which disallows tax deductions for payments to MSMEs if not made within the prescribed time limits—45 days when there is a written agreement, and 15 days otherwise. If payments are delayed beyond these limits, they will be disallowed as business expenses, increasing taxable income.
What Business entities need to know:
- Accurate identification of MSME vendors is now crucial for compliance.
- All payments to MSMEs—on time or delayed—must now be disclosed in the tax audit report.
- Payments made beyond the 45/15-day deadline will not be allowed as deductions under Section 43B(h).
Key Challenges:
Many business entities may find it difficult to verify which vendors qualify as MSMEs. To avoid compliance risks, business entities are advised to collect updated Udyam Registration Certificates and flag MSME vendors in their accounting systems.
This update increases compliance requirements but also aims to support small enterprises by enforcing timely payments. Business entities must ensure proper classification of vendors, maintain payment records, and coordinate with their tax advisors to avoid disallowances during audits.
In summary, this update reflects the government’s push to protect MSMEs while also demanding greater accountability and transparency from business entities in their tax filings.
ABC India Private Limited transacts with multiple micro or small enterprises during the year ended 31 March 2025. During the year, it made total purchases/services from MSEs worth Rs. 5,00,000. The details of the payment made were as under:
1. Paid within agreed time/45 days: ₹3,50,000
2. Paid after 45 days: ₹50,000
3. Unpaid to MSEs as of the year-end (31 March 2025): ₹1,00,000
Further, the interest payable (u/s 23 of MSMED Act) for delayed payments: ₹6,000
Disclosure in clause 22 will be as follows:
| Particulars | Amounts |
| (i) Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act); or | 6,000 |
| (ii) Total amount required to be paid to a micro or small enterprise, as referred to in section 15 of the MSMED Act, during the previous year; | 5,00,000 |
| (iii) Of amount referred to in (ii) above, amount | |
| (a) paid up to time given under section 15 of the MSMED Act; | 3,50,000 |
| (b) not paid up to time given under section 15 of the MSMED Act and inadmissible for the previous year. | 1,00,000 |