Section 43B(h) MSME Payment Rules & Deadlines
Section 43B(h) of the Income-tax Act, 1961, mandates that payments to Micro and Small Enterprises (MSEs) must be made within the deadlines prescribed under Section 15 of the MSMED Act, 2006. If a business fails to clear these dues within the specified timeline, the corresponding business expenditure is disallowed as a deduction for that financial year, increasing taxable business income and tax liability.
The 15-Day and 45-Day Payment Timelines
- No Written Agreement: If there is no written agreement between the buyer and the MSE supplier, payment must be made within 15 days from the date of acceptance of the goods/services.
- With Written Agreement: If there is a written agreement, the payment must be made as per the agreed terms, but this period cannot exceed 45 days. Any agreement clause specifying more than 45 days is legally deemed to be 45 days.
Which Enterprises Qualify under Section 43B(h)?
The payment disallowance rule applies strictly based on the size and registration status of the supplier:
- Micro Enterprises: Investment in plant & machinery/equipment <= ₹1 crore AND annual turnover <= ₹5 crore.
- Small Enterprises: Investment in plant & machinery/equipment <= ₹10 crore AND annual turnover <= ₹50 crore.
- Udyam Registration Mandatory: The supplier must hold a valid active Udyam registration on the date of transaction to claim benefits under Section 43B(h).
- Medium Enterprises Excluded: The rule does not apply to Medium Enterprises (turnover up to ₹250 crore).
- Retailers and Wholesalers Excluded: As per Office Memorandum (OM) No. 5/2(2)/2021-E/P&G/Policy dated 02.07.2021, traders registered under Udyam are eligible only for Priority Sector Lending. They are excluded from the MSMED Act's delayed payment provisions, so purchases from traders are not subject to Section 43B(h) disallowance.
The March 31 Cut-off and Add-Back Consequences
The year-end disallowance mechanics depend strictly on whether the payment was made by March 31:
- Paid within timeline: The expense is allowed as deduction in the year of accrual.
- Paid delayed but within the same FY: If the payment is made after the 15/45 day limit but before March 31, the deduction is allowed in the same FY.
- Outstanding on March 31: If the payment is delayed beyond the 15/45 day limit and remains unpaid as of March 31, the entire expense is disallowed and added back to the business's taxable profit for that year.
- Deduction in Year of Payment: The disallowed expenditure can only be claimed as a deduction in the subsequent financial year in which the payment is actually made.
Mathematical Impact of Disallowance
Consider a manufacturing company with a net profit before tax of ₹50,00,000 for FY 2025-26. It purchased raw materials worth ₹15,00,000 from a registered micro-manufacturer. The payment was due under agreement within 45 days (by Feb 15, 2026) but was actually paid on May 10, 2026:
- Expense Disallowed: Since the ₹15,00,000 was unpaid on March 31 and exceeded the 45-day limit, it is added back to taxable profits.
- Adjusted Taxable Income: ₹50,00,000 + ₹15,00,000 = ₹65,00,000.
- Additional Tax Payable (at 30% plus surcharges/cess, approx 31.2%): ₹15,00,000 × 31.2% = ₹4,68,000. This creates a temporary cash outflow in tax.
- FY 2026-27 Relief: The company can claim the ₹15,00,000 deduction in FY 2026-27 when filing that year's ITR.
Three Times Bank Rate Interest Penalty
Under Section 16 of the MSMED Act, 2006, delayed payments to registered MSEs attract compound interest with monthly rests at three times the bank rate notified by the RBI. Under Section 23 of the MSMED Act, this interest is strictly non-deductible as a business expense under the Income-tax Act, meaning the buyer bears the full interest cost without tax benefits.
Frequently Asked Questions
1. Does Section 43B(h) apply to outstanding dues of previous years?
No. Section 43B(h) was introduced by the Finance Act 2023 and applies to expenses incurred on or after April 1, 2024. Dues from previous financial years are not subject to this disallowance rule.
2. Does this rule apply if the supplier is not registered on the Udyam portal?
No. The disallowance under Section 43B(h) applies only to payments due to micro and small enterprises that are registered under the MSMED Act, 2006 (holding an active Udyam registration). It is highly recommended to obtain written confirmation or Udyam certificates from suppliers annually.
3. Does Section 43B(h) apply to Medium Enterprises?
No. The MSMED Act defines three classes: Micro, Small, and Medium. Section 43B(h) specifically references only Micro and Small enterprises. Dues to Medium Enterprises (turnover between ₹50 crore and ₹250 crore) are not subject to year-end tax disallowance.
4. Are traders covered under the Section 43B(h) payment rules?
No. Retail and wholesale traders registered under Udyam are only eligible for Priority Sector Lending (PSL) benefits. Dues to traders are excluded from the delayed payment provisions of the MSMED Act and are not subject to Section 43B(h) disallowance.
5. What happens if a payment is made after the 45-day deadline but before March 31?
If the payment is delayed beyond the 15 or 45-day limit but is cleared on or before March 31 of the same financial year, the deduction is allowed in that financial year itself. No tax add-back is required, though delayed interest under the MSMED Act remains payable.
6. Can we agree to a payment term of 60 or 90 days in writing?
No. Under Section 15 of the MSMED Act, the maximum credit period that can be agreed upon in writing is 45 days. Any clause in a contract or agreement specifying a credit period exceeding 45 days is invalid, and the deadline is legally capped at 45 days.
7. Does the Section 43B(h) disallowance apply to capital expenditure?
No. Section 43B(h) applies to business expenditures claimed as deductions under the profit and loss account (revenue expenses). Capital expenditures (like purchase of machinery or buildings) are capitalized as assets and are not subject to this disallowance.
8. What is the rate of interest payable on delayed MSME payments?
The buyer is liable to pay compound interest with monthly rests at three times the RBI bank rate on the delayed amount. This interest rate is typically around 20-22% per annum, depending on the prevailing RBI bank rate.
9. Is the interest paid on delayed MSME payments tax-deductible?
No. Section 23 of the MSMED Act, 2006, explicitly prohibits the deduction of interest paid on delayed MSME payments. It cannot be claimed as an expense under the Income-tax Act, 1961.
10. How does a business verify if a supplier is a registered Micro or Small enterprise?
You should request the supplier to provide their Udyam Registration Certificate. The certificate details their classification (Micro, Small, or Medium) and enterprise type (Manufacturing, Service, or Trading). You can also verify the Udyam number online on the government portal.
11. Does Section 43B(h) apply to provisions made at the end of the year?
Yes. If provisions are made for expenses payable to registered MSEs at year-end, the invoice date or receipt date determines the payment deadline. If the payment is not made within the 15/45-day limit, the provision will be disallowed.
12. Does Section 43B(h) apply to taxpayers filing under presumptive taxation (Sections 44AD/44ADA)?
No. Taxpayers filing under presumptive taxation schemes (like Section 44AD for business or 44ADA for professionals) pay tax on a flat percentage of turnover. Since they do not claim actual business expenses, Section 43B(h) disallowance is not applicable to them.
13. What if the supplier shifts from Small to Medium category during the year?
If the supplier shifts to the Medium category, the disallowance under Section 43B(h) will not apply to transactions entered into after their category changes, as Medium Enterprises are exempt from the rule.
14. Can an MSE supplier waive their right to receive interest on delayed payments?
No. The provisions of the MSMED Act are statutory and mandatory. Any waiver or agreement to not pay interest is legally void, and the buyer remains liable for the interest.
15. How do auditors report Section 43B(h) compliance in Form 3CD?
Tax auditors must report details of disallowed MSME payments under Clause 22 of Form 3CD, listing the principal amount unpaid beyond the MSMED Act deadlines and interest due thereon.