Delayed payments to micro and small enterprises have long been a policy concern. Section 43B(h) of the Income-tax Act, 1961, read with the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, links tax deductibility of trade payables to timely payment of MSME suppliers.
For buyers, the provision affects cash flow planning, year-end provisioning, and supplier relationships. For MSME vendors, it strengthens bargaining power for agreed credit periods and statutory interest on delays.
This article explains applicability, exclusions, timelines, disallowance mechanics, interest under the MSMED Act, practical compliance steps, and impact on working capital.
Applicability
Clause (h) of Section 43B applies when an enterprise purchases goods or receives services from a micro or small enterprise registered under the MSMED Act, 2006, and the amount remains unpaid beyond permitted timelines.
As per the MSMED Act (as amended and aligned with Udyam criteria):
- Micro enterprise (manufacturing/services): Investment in plant and machinery or equipment 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: Higher thresholds — Section 43B(h) does not cover medium enterprises; only micro and small.
Buyers should obtain Udyam registration certificates and verify classification as on the date of supply, not merely registration status.
Trading concerns not covered
As per Office Memorandum No. 5/2(2)/2021-E/P and G/Policy dated 2 July 2021, wholesale and retail traders are entitled to Udyam registration only for Priority Sector Lending benefits. Such traders are not “enterprises” for MSMED delayed-payment provisions in the same manner as manufacturing and service MSMEs.
Accordingly, Section 43B(h) does not apply to amounts outstanding to wholesale/retail traders that are registered only for PSL purposes. Document supplier activity codes and enterprise type before applying MSME payment rules.
Effective date
Section 43B(h) was inserted by the Finance Act, 2023 and applies from 1 April 2024, relevant for assessment year 2024-25 onwards. Amounts outstanding as on 31 March 2024 that relate to supplies accepted before 1 April 2024 require careful analysis with professional advice on transitional issues.
Time limit for payment
Section 15 of the MSMED Act specifies maximum credit periods. For income-tax disallowance, the buyer must pay within:
- No written agreement: 15 days from the date of acceptance of goods or services (or deemed acceptance under the Act).
- Written agreement: 45 days from acceptance, or the period agreed in writing, whichever is lower.
“Date of acceptance” follows MSMED Act definitions — delivery, inspection, and written objections affect the start date. Align purchase order terms with statutory caps.
Disallowance under the Income-tax Act
Any sum payable to a micro or small enterprise beyond the MSMED time limit shall be allowed as a deduction only in the previous year in which the sum is actually paid, irrespective of the method of accounting followed (mercantile or cash).
Illustrative effect
| Scenario | Expense booked | Tax deduction timing |
|---|---|---|
| Invoice ₹10 lakh, MSME unpaid at year-end, paid next July | FY 2024-25 books | Allowed in FY of payment |
| Partial payment before year-end | Full expense accrued | Proportion paid — allowed; balance on actual payment |
Disallowance increases taxable income for the year of accrual; deduction in the year of payment may create timing differences across years. Consider advance tax impact.
Interest under the MSMED Act
Delayed payments attract compound interest at three times the bank rate notified by the Reserve Bank of India. Interest is payable by the buyer to the MSME supplier and is a statutory obligation independent of income-tax disallowance.
Interest paid on delayed MSME payments is not allowable as a deduction under the Income-tax Act. Buyers should model interest cost in vendor negotiations and settlement agreements.
Practical compliance steps
- Maintain a register of MSME vendors with Udyam number, enterprise category, and acceptance dates.
- Configure ERP ageing reports flagged at 15/45-day thresholds from acceptance, not invoice date alone.
- Reconcile unpaid MSME dues before 31 March; plan payments or disclose tax impact in tax computations.
- Standardise written agreements with credit periods not exceeding 45 days where Section 43B(h) applies.
- Coordinate with GST ITC — delayed payment may trigger 180-day reversal under GST rules separately.
- Include representations in tax audit Form 3CD where applicable.
Impact on working capital
Large corporates with extended supplier credit policies must shorten payment cycles for MSME vendors or face higher cash tax outflows from disallowance. Benefits include improved MSME cash flows and reduced interest disputes.
- Prioritise MSME invoices in weekly payment runs.
- Negotiate early-payment discounts instead of unwritten long credit.
- Segregate MSME vs non-MSME payables in treasury dashboards.
- Assess need for working capital facilities for March payment spikes.
This article is for general information on professional subjects. For application to specific facts, consult a chartered accountant.