Delayed payments have long been a problem for small suppliers. To encourage prompt settlement, the Finance Act 2023 introduced clause (h) in section 43B of the Income-tax Act, 1961. Under section 43B(h) MSME payment rules, amounts owed to micro and small enterprises that are not paid within the time allowed under the MSMED Act are deductible only in the year they are actually paid. For a buyer with large supplier balances at year end, this can shift a significant expense into the next year.
This article explains who is covered, how the time limits work, how the disallowance is computed, and what finance teams can do to stay on the right side of the rule. The provision applies from FY 2023-24 and continues under the Income-tax Act, 2025 among the deductions allowed only on actual payment.
Key takeaways
- The rule applies to amounts payable to micro and small enterprises registered under the MSMED Act; medium enterprises are not covered.
- The time limit is 15 days from acceptance where there is no written agreement, and the agreed period, capped at 45 days, where there is one.
- If an amount remains unpaid beyond the time limit at the end of the year, the expense is allowed only in the year of actual payment.
- The usual relief for payment before the return due date does not apply to this clause.
- Interest payable to MSMEs for delayed payment under the MSMED Act is not deductible.
Who is covered?
The rule applies when the supplier is a micro or small enterprise under the MSMED Act, 2006, usually evidenced by Udyam registration. Key points:
- Medium enterprises are outside the rule.
- Traders: the delayed payment provisions of the MSMED Act are generally understood not to extend to wholesale and retail traders, even if they hold Udyam registration for other purposes. Buyers should confirm the classification shown on the supplier’s Udyam certificate.
- Unregistered suppliers: the rule applies to enterprises registered under the MSMED Act; obtain and keep declarations from suppliers.
- Nature of purchase: the rule covers goods and services supplied by the MSE to the buyer in the course of business; capital goods are generally treated differently because their cost is claimed through depreciation, so seek advice on specific cases.
Our guide on Udyam registration and MSME benefits explains how enterprises are classified.
How the time limits work
Section 15 of the MSMED Act requires the buyer to pay:
- On or before the date agreed in writing, which cannot exceed 45 days from the day of acceptance (or deemed acceptance) of the goods or services, or
- Where there is no written agreement, within 15 days of acceptance.
The day of acceptance is usually the date of delivery or performance, unless an objection is raised within the specified period. Section 43B(h) uses this MSMED Act deadline to decide whether the deduction is at risk.
Worked cases at the year end
Assume the financial year ends on 31 March and the buyer has a written agreement with each supplier for 45-day credit.
| Case | Invoice accepted | MSMED due date | Payment date | Deduction for the year ending 31 March? |
|---|---|---|---|---|
| A | 5 January | 19 February | 15 February | Yes – paid within time |
| B | 5 January | 19 February | 10 March | Yes – paid late but within the same year |
| C | 5 January | 19 February | 20 April | No – overdue at year end; allowed next year |
| D | 1 March | 15 April | 10 April | Yes – paid within the MSMED time limit |
| E | 1 March | 15 April | 30 April | No – paid after the time limit; allowed next year |
Cases B and C show why the year end matters. A late payment made within the same year still gets the deduction that year. An amount that is overdue and unpaid at year end, or paid after the MSMED deadline in the following year, moves to the year of payment.
Illustration of the impact
A manufacturer has ₹80 lakh payable to micro and small suppliers on 31 March, of which ₹30 lakh is beyond the 45-day limit and paid only in May. The ₹30 lakh is added back to income for the current year and claimed next year. At a 25% tax rate (plus surcharge and cess), this means roughly ₹7.5 lakh or more of tax paid a year earlier than expected, besides interest on any resulting shortfall in advance tax.
Where interest comes in
If payment is delayed, the MSMED Act entitles the supplier to compound interest at three times the bank rate notified by the RBI. That interest is not deductible for income-tax purposes, so late payment carries a double cost: the timing disallowance under section 43B(h) and a permanent disallowance of any interest paid. Suppliers may also approach the MSME Facilitation Council for recovery, which adds management time and strains relationships.
Reporting and documentation
- The disallowance is reported in the tax audit report where the business is subject to tax audit, and reflected in the computation of income. Our tax audit checklist covers the preparation steps.
- Companies also disclose MSME dues and interest in their financial statements under Schedule III.
- Maintain for each MSE supplier: Udyam certificate, classification, credit terms, invoice acceptance dates and payment dates.
A practical payables process
- Tag suppliers in the vendor master as micro, small, medium or non-MSME, with Udyam numbers and certificate copies.
- Record credit terms in written purchase orders or agreements, not exceeding 45 days.
- Capture acceptance dates for goods receipts and service confirmations.
- Run a weekly ageing report for MSE suppliers highlighting invoices approaching the deadline.
- Prioritise MSE payments in the payment run, particularly in February and March.
- Reconcile at year end and compute the disallowance before closing the books and paying the last advance tax instalment.
- Review annually: suppliers’ classifications can change, so ask for updated declarations each year.
Frequently asked questions
Does section 43B(h) apply to payments to medium enterprises?
No. The clause covers only micro and small enterprises as defined under the MSMED Act.
If I pay before filing my return, will the deduction be allowed for the same year?
Not under this clause. Unlike other items in section 43B, payment before the return due date does not save the deduction if the MSMED time limit has passed.
What if my agreement allows 60 days’ credit?
The MSMED Act caps the agreed period at 45 days, so payment after 45 days is treated as late for this purpose.
Does the rule apply to businesses using presumptive taxation?
Where income is computed on a presumptive basis, expenses are not claimed separately, so the disallowance generally has no practical effect.
If you would like help setting up an MSME payables tracker or reviewing your year-end exposure under section 43B(h), our team would be glad to assist.
This article is general information based on the law as of September 2026, and is not legal or tax advice. Please check the facts of your own case with a professional before acting.
