Section 43B(h): MSME 45-Day Payment Rule

Section 43B(h): The MSME 45-Day Payment Rule Explained

If you buy goods or services from a small vendor and pay late, you don't just annoy your supplier. You can lose a tax deduction too. That's the entire idea behind Section 43B(h) of the Income Tax Act, and it's one of the few tax rules that actually changes how businesses run their accounts payable, not just how their accountant files returns.

Here's the short version: pay a registered micro or small enterprise within the time limit set by law, and the expense is deductible in the year you booked it. Miss that window, and the deduction moves to whichever year you actually pay. No exceptions, no grace period past the cap.

The rest of this guide walks through who this applies to, the exact day counts, worked examples, what happens if you're late, and what changes now that the Income Tax Act, 2025 is in force.

What Section 43B(h) Actually Says

Section 43B of the Income Tax Act has always worked on a "pay first, deduct later" logic for certain expenses like statutory dues, bonuses, and provident fund contributions. The Finance Act, 2023 added clause (h) to that list, and it took effect from April 1, 2024, applying from Assessment Year 2024-25 onward.

Clause (h) says any amount owed to a Micro or Small Enterprise for goods or services can be deducted in the same financial year, but only if it's paid within the time limit fixed under Section 15 of the MSMED Act, 2006. Pay late, and the deduction shifts to the year the payment actually clears your bank, regardless of whether you keep your books on a cash or accrual basis.

Who This Applies To

The rule kicks in the moment your supplier is a registered Micro or Small Enterprise under the MSMED Act, 2006. Your own business doesn't need to be MSME-registered for the clause to apply. Only your vendor's status matters.

Example: Suppose Rohan runs an unregistered trading firm and buys packaging material from a supplier who holds Udyam registration as a small enterprise. Section 43B(h) applies here, because the law looks at the seller's registration, not the buyer's.

There's one carve-out worth knowing. A government office memorandum (dated July 2, 2021) clarified that wholesale and retail traders get Udyam registration only for Priority Sector Lending benefits, not general MSME status. Because of this, Section 43B(h) doesn't apply to dues owed to traders. It covers manufacturers and service providers only.

Example: If the same Rohan buys goods from a trader who happens to hold a trader-category Udyam certificate, the clause won't apply, because a trader falls outside the MSMED Act's definition of an enterprise for this purpose.

The 15-Day and 45-Day Time Limits

Section 15 of the MSMED Act, 2006 sets two possible deadlines, and which one applies depends entirely on whether you have a written agreement with your supplier:

• No written agreement: payment is due within 15 days of accepting the goods or services.
• Written agreement: payment is due by whatever date the agreement specifies, but that date can never be later than 45 days from acceptance. Even if both sides agree to 60 or 90 days on paper, the tax law still treats 45 days as the outer limit.

The clock starts from the day of acceptance, or the day of deemed acceptance if the buyer never formally objects to the goods within 15 days of delivery.

Worked Examples: When the Deduction Falls

Notice the pattern: whenever payment lands after the statutory due date, the deduction jumps forward to whichever financial year the money actually left your account, even if that's a full year later.

What Happens If You Pay Late

Late payment carries two separate consequences, and they stack.

Tax consequence: the unpaid amount adds back to your taxable income for that year, since you can't claim it as a deduction until you've actually paid. You'll get the deduction eventually, just in the payment year, which means your tax outgo for the current year is higher than it would otherwise be.

Interest consequence: under the MSMED Act, a buyer who pays late owes the supplier compound interest at three times the RBI's notified bank rate, calculated monthly from the day after the 15-day acceptance window (the "appointed day") until actual payment. And this interest itself isn't deductible under the Income Tax Act, so a late payment costs you twice: once in deferred deduction, once in non-deductible interest.

Your tax auditor is also required to report outstanding MSME dues in Form 3CD of the tax audit report, and if you don't add back the disallowed amount yourself in your return, the Centralised Processing Centre in Bengaluru will do it during processing and recompute your tax liability.

Why This Rule Exists

MSMEs in India employ well over a hundred million people, and delayed payments from larger buyers have historically been one of the biggest drags on their working capital. Section 43B(h) ties a real tax cost to the practice of sitting on MSME invoices, which gives large buyers a financial reason (not just a moral one) to pay on time.

For the MSME supplier, the upside is straightforward: steadier cash flow, stronger footing when negotiating payment terms with bigger clients, and fewer disputes over stretched-out dues. For the buyer, paying on schedule protects the deduction in the correct year and keeps the books cleaner come audit time.

Section 43B(h) Under the Income Tax Act, 2025

The Income Tax Act, 1961 has been replaced by the Income Tax Act, 2025, effective April 1, 2026, applicable from what the new Act calls the "tax year" 2026-27 onward (the concepts of "previous year" and "assessment year" have been merged into this single term). The new Act restructures and renumbers most provisions, cutting roughly 819 sections down to about 536.

The substance of Section 43B(h) carries over unchanged: MSME dues still lose their current-year deduction if paid beyond the 15/45-day window under the MSMED Act. What has moved is the section number itself. If you're updating contracts, tax audit templates, or accounting software, don't assume the old "43B(h)" label still applies going forward, and don't rely on a quick search-and-replace either, since several provisions were renumbered differently. Check the CBDT's official concordance table at incometax.gov.in before quoting a section number in a filing, opinion, or agreement.

How to Check If Your Supplier Is a Registered MSME

Before you can apply this rule correctly, you need to know your supplier's registration status and category (Micro, Small, or Medium). You can verify this two ways:

1. Ask the supplier for their Udyam Registration Number and cross-check it on the Udyam Registration portal.
2. If they aren't registered, a written declaration from the supplier confirming their MSME status can also be considered, since Udyam registration itself isn't mandatory for the clause to apply.

Current MSME Classification Limits

Since March 2025, the investment and turnover thresholds that define Micro and Small enterprises were revised upward:

• Micro Enterprises: investment in plant and machinery up to Rs 2.5 crore, turnover up to Rs 10 crore.
• Small Enterprises: investment up to Rs 25 crore, turnover up to Rs 100 crore.

These wider limits mean more of your existing vendors may now qualify as MSMEs than did before the revision, so it's worth re-checking Udyam status across your supplier list rather than assuming last year's classification still holds.

A Practical Compliance Checklist

• Collect Udyam Registration Numbers for every vendor at onboarding, not after an invoice is already overdue.
• Track acceptance dates and due dates per invoice, not just the invoice date.
• Flag invoices approaching day 10 (no agreement) or day 40 (with agreement) so payment goes out before the statutory clock runs out.
• Keep written agreements on file wherever you've negotiated a longer credit period, since the 45-day cap only helps you if you can prove the agreed terms.
• Reconcile outstanding MSME dues before March 31 each year, since anything unpaid at year-end drives the Form 3CD disclosure and the tax add-back.

Frequently Asked Questions

Does Section 43B(h) apply if I'm not MSME-registered myself?

Yes. The clause looks at your supplier's registration, not yours. As long as the seller is a registered Micro or Small Enterprise, the rule applies to your payment.

Is Section 43B(h) applicable to traders?

No. Wholesale and retail traders are excluded, since their Udyam registration only covers Priority Sector Lending eligibility. The clause applies to manufacturers and service providers.

What is the "appointed day" under the MSMED Act?

It's the day immediately after the 15-day acceptance window ends, and it's the date from which late-payment interest starts accruing if payment hasn't been made.

Can I carry forward a late payment for deduction in a future year?

Yes, but only in the year you actually pay. There's no separate carry-forward mechanism; the deduction simply moves to whichever financial year the payment happens in.

Is registering on the Udyam portal compulsory for suppliers?

No. Udyam registration isn't mandatory, though a supplier's written declaration of MSME status can also be used to establish applicability of the clause.

Will Section 43B(h) still exist after the Income Tax Act, 2025 takes effect?

Yes, in substance. The requirement to pay MSME vendors within 15 or 45 days to protect your current-year deduction carries forward under the new Act, though it now sits under a different section number.