What every buyer doing business with registered MSMEs needs to know — before it costs them a deduction.
By the Tax Advisory DeskEffective: AY 2024–25 onwardsApplicable: All taxpayers under PGBP Running a business today means navigating an ever-growing web of compliance obligations. But tucked inside the Finance Act 2023 is one amendment that continues to catch buyers off-guard, costing them valuable income tax deductions and triggering avoidable disputes. We’re talking about the insertion of clause (h) in Section 43B of the Income Tax Act — a provision that fundamentally changed how payments to MSME suppliers are treated for tax purposes.
This guide is your complete walkthrough: what the rule says, who it affects, when it bites, and — most importantly — how you can stay on the right side of it.
The Law, In Plain Language
Section 43B of the Income Tax Act lists certain expenses that are allowed as deductions only when actually paid — not merely accrued. The Finance Act 2023 added clause (h) to this list, covering:
Any sum payable by an assessee to a micro or small enterprise beyond the time limit specified under Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
The MSMED Act’s Section 15 stipulates that payment to a supplier registered as a micro or small enterprise must be made within 45 days from the date of acceptance of goods or
services — or within the agreed credit period, which itself cannot exceed 45 days. If no agreement exists, the payment must be made within 15 days.
The tax impact? If you haven’t paid within the stipulated time by March 31 of the relevant financial year, the expense is disallowed in that year and becomes deductible only in the year of actual payment.
Who Is a “Micro or Small Enterprise”?
This is where many buyers make their first error: assuming the rule applies to all MSME-registered businesses. It does not. The provision is specifically limited to enterprises registered as Micro or Small under the MSMED Act — not Medium enterprises.
The current classification thresholds are:
MICRO ENTERPRISE
Investment up to ₹1 crore and turnover up to ₹5 crore
SMALL ENTERPRISE
Investment up to ₹10 crore and turnover up to ₹50 crore
MEDIUM ENTERPRISE
Investment up to ₹50 crore and turnover up to ₹250 crore — NOT covered under 43B(h)
Verification is your responsibility. You must confirm whether your supplier holds a valid Udyam Registration Certificate (URC) and whether they are classified as Micro or Small — at the time of entering into the transaction.
Breaking Down the 45-Day Clock
The timeline under Section 15 of the MSMED Act operates as follows:
Goods or services are supplied and the date of acceptance (or deemed acceptance) is established.
If there is a written agreement setting a credit period, payment must be made within that period — but the period cannot exceed 45 days.
If there is no written agreement, payment must be made within 15 days of acceptance.
If payment is not made within the agreed/stipulated period by March 31 of the financial year, the deduction is denied for that year under Section 43B(h).
“The deduction is not lost — it merely travels forward to the year in which actual payment is made.”
This deferral might sound manageable, but in practice it can significantly distort your taxable income for the year, increase advance tax liability, and attract interest under Sections 234B and 234C.
Practical Scenarios: When Does the Rule Apply?
SAFE — DEDUCTIBLE
Invoice dated Jan 15, 2024. Agreement: 30-day credit. Paid Feb 10, 2024. Paid within 45 days ✓
BORDERLINE
Invoice dated Feb 20, 2024. Agreement: 45-day credit. Paid March 31, 2024. Just within window — verify exact dates.
DISALLOWED
Invoice dated Feb 1, 2024. Credit period: 45 days. Due: March 17. Paid April 5, 2024. Deduction denied in FY 2023–24.
WHAT IF THERE’S NO WRITTEN AGREEMENT?
If no credit period is formally agreed upon, Section 15 of the MSMED Act defaults to a 15-day payment window. This is a stricter timeline that many businesses overlook. Verbal agreements or standard-practice “30-day terms” carry no weight — only written contracts provide the extended 45-day window.
Applicability: Who Needs to Worry?
Section 43B(h) applies to all assessees computing income under the head “Profits and Gains of Business or Profession” (PGBP) — this includes:
Proprietorships, partnership firms, LLPs, companies (both private and public), and any other entity declaring business income. The provision is not limited by turnover or scale — if you buy from a Micro or Small enterprise and compute PGBP income, you are in scope.
A common misconception to avoid: Some taxpayers believe the provision only applies to large corporates. It does not. A small trader purchasing raw materials from a Micro-registered supplier is equally exposed to disallowance if payments are delayed.
Impact on Your Books and Tax Return
From an accounting and tax filing standpoint, delayed payments to registered MSMEs create the following cascading effects:
- Disallowance in current year:The outstanding amount as at March 31 is added back to taxable income.
- Deferred deduction:The disallowed amount becomes deductible only in the financial year of actual payment — regardless of which year it was accrued.
- Advance tax implications:Higher taxable income in the current year may lead to short payment of advance tax and consequential interest under Sections 234B and 234C.
- MSMED Act penalties:Separately, delayed payment under the MSMED Act also attracts compound interest at three times the bank rate — which is not tax deductible.
Building a 43B(h) Compliance Framework
The good news: with the right systems in place, compliance is straightforward. Here’s a structured approach:
STEP 1 — VENDOR CLASSIFICATION AUDIT
Maintain an updated vendor master that captures the Udyam Registration Number and enterprise classification (Micro/Small/Medium) for every supplier. Request URC copies annually. The classification can change if a supplier grows or restructures.
STEP 2 — FORMALIZE CREDIT TERMS IN WRITING
Ensure all purchase orders and vendor agreements with Micro and Small suppliers explicitly state the credit period (not exceeding 45 days). A verbal or informal arrangement gives you only 15 days and creates documentary risk in an audit.
STEP 3 — SET UP PAYMENT MONITORING
Configure your accounts payable system to flag invoices from MSME-classified vendors as they approach the 45-day deadline. ERP systems like Tally, SAP, or Zoho Books can be customized for this — or a simple Excel tracker with conditional formatting works too.
STEP 4 — YEAR-END REVIEW BEFORE MARCH 31
In the last two weeks of March, run a sweep of all outstanding MSME payables. Any invoice due beyond the statutory window that you can clear before March 31 should be prioritized — this directly protects your deductions for the year.
STEP 5 — DISCLOSURE IN TAX RETURN
Schedule MSME of the ITR requires disclosure of amounts due to Micro and Small enterprises. Ensure your CA has accurate data from your books to populate this correctly and avoid scrutiny triggers.
Frequently Asked Questions
DOES THIS APPLY TO MEDIUM ENTERPRISES TOO?
No. Section 43B(h) explicitly refers to Section 15 of the MSMED Act, which covers Micro and Small enterprises only. Payments to Medium enterprises are not affected by this provision — though they remain subject to other accrual and payment norms.
WHAT IF THE SUPPLIER RECENTLY LOST MSME REGISTRATION?
The relevant date for classification is generally the date of the transaction. If a supplier was Micro or Small at the time of the supply, the obligation applies — even if their status changes later in the year.
DOES 43B(H) APPLY IF BOTH PARTIES ARE MSMES?
Yes. The provision applies to the buyer, not the seller. If you are a Micro/Small enterprise purchasing from another Micro/Small enterprise, you must still comply with the 45-day rule as the paying party.
CAN INTEREST PAID ON DELAYED PAYMENTS BE CLAIMED AS A DEDUCTION?
No. Interest payable under Section 16 of the MSMED Act for delayed payments is explicitly non-deductible under the Income Tax Act. It is a punitive cost with no tax relief.
The Bottom Line: Section 43B(h) is not merely a procedural technicality — it is a direct link between your payment behavior and your tax liability. Businesses that treat MSME payments with the same rigor as advance tax installments will find compliance achievable and the deductions fully intact. Those who don't may face unwelcome surprises at year-end.
Need help reviewing your MSME payables before year-end?
Our tax advisory team can audit your vendor classification, review outstanding balances, and help you avoid disallowances before March 31. Reach out for a consultation.
