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Income Tax · BusinessSection 43B(h): MSME payment delays and the tax deduction
Since April 2023, unpaid dues to micro and small suppliers are not deductible unless paid within 15 or 45 days. Section 43B(h) has caused large disallowances in tax audits. Here is who is covered, how to check, and how to plan year-end payments.
Section 43B of the Income-tax Act, 1961 allows certain expenses only on actual payment. Clause (h), inserted by the Finance Act, 2023 and effective from FY 2023-24, covers sums payable to micro and small enterprises beyond the time limit in Section 15 of the MSMED Act. The rule continues under the Income-tax Act, 2025 among deductions allowed on payment.
The rule in brief
If a buyer owes money to a micro or small enterprise and does not pay within the time allowed under the MSMED Act, the expense is allowed only in the year of actual payment.
| Agreement | Time limit |
|---|---|
| Written agreement specifying a period | That period, but not more than 45 days from the day of acceptance |
| No written agreement | 15 days from acceptance |
Who is a covered supplier
- Registered on the Udyam portal as a micro or small enterprise.
- Engaged in manufacturing or services.
- Classification (2025 revision): micro – investment up to ₹2.5 crore and turnover up to ₹10 crore; small – investment up to ₹25 crore and turnover up to ₹100 crore (check the current notification).
- Not covered: medium enterprises; traders (retail and wholesale traders registered on Udyam are limited to priority sector lending benefits, not the delayed payment provisions).
Who is the buyer
Any business computing income under the normal provisions. Presumptive taxpayers are outside the rule.
Worked example 1
Example: Aravali Packaging (buyer, books closing 31 March 2026) has these payables on 31 March 2026:
| Supplier | Status | Invoice / acceptance date | Agreement | Paid on | Within limit? | Deductible in FY 2025-26? |
|---|---|---|---|---|---|---|
| A (micro manufacturer) | Udyam micro | 10 Mar 2026 | 45 days | 20 Apr 2026 | Yes (41 days) | Yes |
| B (small, services) | Udyam small | 1 Feb 2026 | None (15 days) | 25 Apr 2026 | No | No – allowed in FY 2026-27 |
| C (medium) | Udyam medium | 1 Jan 2026 | 60 days | 10 May 2026 | Not covered | Yes |
| D (trader) | Udyam micro – trader | 15 Jan 2026 | 30 days | 30 Apr 2026 | Not covered | Yes |
Only supplier B's amount is disallowed for FY 2025-26, because payment was due by 16 February 2026 (15 days) and was made only in the next year.
Worked example 2: impact
If supplier B's outstanding was ₹18,00,000 and Aravali is a firm taxed at 30%, the disallowance increases FY 2025-26 tax by about ₹5.6 lakh (with cess). The amount is allowed in FY 2026-27 when paid – a timing difference, but a real cash cost, plus interest under Sections 234B/234C if advance tax was based on the lower income.
Interest under MSMED Act
Separately, the MSMED Act requires the buyer to pay compound interest at three times the RBI bank rate on delayed payments, and this interest is not deductible for income tax.
Practical steps
- Collect Udyam certificates from all suppliers; record category (micro/small/medium) and activity (manufacturer/service/trader) in the vendor master.
- Have written agreements with payment terms up to 45 days.
- Track ageing for MSE suppliers monthly.
- Pay within the 15/45-day limit. Unlike other Section 43B items, paying by the return due date does not help – the test is the MSMED Act time limit.
- Disclose MSME dues in financial statements (Schedule III requirement for companies) and in Form 3CD (clause 22 and clause on 43B).
Tax audit reporting
Form 3CD requires reporting of amounts inadmissible under Section 43B, including clause (h), and interest inadmissible under the MSMED Act. Auditors ask for supplier confirmations and Udyam details.
Common mistakes
- Treating the return due date as the payment deadline (that is for other 43B items, not clause (h)).
- Applying the rule to traders and medium enterprises.
- Not having Udyam data in the vendor master.
- Counting from invoice date when goods were accepted later (or vice versa).
Key takeaway
Pay micro and small manufacturers and service providers within 15 days (no agreement) or the agreed period up to 45 days, or lose the deduction for that year. Keep Udyam data and ageing reports ready. Our tax audit team helps businesses set up MSME tracking and prepare 43B(h) workings.
Official references
Provisions discussed (summaries in our Law Library):
- Income-tax Act, 2025 – Section Business deductions on payment (corresponds to 43B(h)): Payments to micro & small enterprises
- Income-tax Act, 1961 – Section 43B(h) (corresponds to Business deductions on payment): Payments to micro & small enterprises
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
Which suppliers are covered by Section 43B(h)?
Micro and small enterprises registered under the MSMED Act (Udyam registration) that are manufacturers or service providers. Medium enterprises and traders are not covered by the delayed payment provisions.
What is the time limit for payment?
The period agreed in writing, subject to a maximum of 45 days from acceptance of goods or services. If there is no written agreement, 15 days.
What happens if I pay after the time limit but before the year end?
The deduction is allowed in the year of payment. Since it falls in the same year, there is no disallowance.
Does Section 43B(h) apply to presumptive taxpayers?
No. Businesses under Section 44AD/44ADA/44AE do not compute expenses, so 43B(h) does not apply.
Does 43B(h) apply to capital goods purchased from MSEs?
The provision applies to sums payable that are otherwise deductible. Capital goods are capitalised, not expensed, so 43B(h) mainly affects revenue items (goods for trade, raw materials, services).
How do I know a supplier is micro or small?
Ask for the Udyam certificate and verify on the Udyam portal; record the category and activity in the vendor master.
Does 43B(h) apply to dues to a medium enterprise?
No. It covers only micro and small enterprises under the MSMED Act.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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