The 45-Day MSME Payment Rule: What Section 43B(h) Does to Your Tax Bill
You bought ₹40 lakh of packaging from a small supplier in February. You paid them in June, which is when cash allowed. Your CA now tells you the whole ₹40 lakh is being added back to last year's taxable income.
That is Section 43B(h) working exactly as intended. Here is what it says and what to do about it.
What the rule actually says
Section 43B(h) of the Income-tax Act has applied since FY 2023-24. It says a payment due to a Micro or Small enterprise is deductible only in the year it is actually paid, unless it is paid within the time limit set by section 15 of the MSMED Act.
Section 15 gives you two clocks:
- • 45 days — the maximum, and only if you agreed a credit period in writing.
- • 15 days — if you did not. No written agreement means the short clock, not the long one.
Why it bites at the year end
The disallowance is not a penalty and not interest — it is a timing shift, and timing shifts land on a single date. Whatever is still owed past the limit on 31 March is added to that year's income and taxed. You get the deduction back in the year you pay, so the money is not lost, but the tax is due now and the refund arrives a year later.
Section 16 of the MSMED Act sits behind it: a delayed payment attracts interest at three times the RBI bank rate, compounded monthly. That interest is itself not deductible.
You do not classify the vendor. Their certificate does.
Do not try to work out whether a supplier is Micro or Small from their turnover. The classification lives on their Udyam Registration certificate, it is the vendor's to declare, and the thresholds behind it have been revised more than once. Ask every supplier for their Udyam number and the category printed on it, and keep both on the vendor record.
What to fix, in order
Tag your vendors
Collect Udyam numbers and categories, and store them on the party. Until a vendor carries a category, no report can tell you whether that bill is a risk — it will simply show nothing, which reads the same as “nothing to worry about”.
Get credit terms in writing
This is the cheapest fix on the list. A purchase order or a signed terms sheet stating “payment within 45 days” moves you from the 15-day clock to the 45-day one. One email, three times the runway.
Review payables monthly, not in March
By 31 March a bill that has run past the limit cannot be un-run. The review has to happen while there is still time to pay.
File MSME Form-1
Companies file a half-yearly return of amounts outstanding to Micro and Small suppliers beyond 45 days, reckoned as at 31 March and 30 September. The same list that keeps you out of a disallowance is the list that fills this form.
Common questions
Does this apply if I file under presumptive taxation?
Generally no — 43B(h) governs a deduction you are otherwise claiming, and under 44AD or 44ADA you are not claiming actual expenses. Confirm your own position with your CA.
The vendor registered on Udyam after I bought from them. Does the rule apply?
What matters is their status at the time of the transaction, so ask for the certificate and check its date rather than just the number.
Is the delayed-payment interest deductible?
No. Interest under section 16 of the MSMED Act is expressly not allowed as a deduction, so it costs you the interest and the tax on it.
What if the vendor never asked for the money?
It makes no difference. The clock runs from acceptance of the goods or services, not from a reminder.
This is a general explanation, not tax advice. Section 43B(h) interacts with your method of accounting and the nature of each vendor — take your own CA's view before acting on it.
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