Delayed payments have long been a threat to the survival of small businesses in India. To address this, Section 43B(h) of the Income Tax Act links the deductibility of a business expense to timely payment of micro and small enterprises. In simple terms, if a buyer fails to pay a registered micro or small supplier within the prescribed time, the expense cannot be claimed as a deduction until it is actually paid. For businesses of every size, understanding this rule is now essential.
What the Rule Actually Says
Section 43B(h) works alongside the MSMED Act, 2006. Under the MSMED Act, when there is a written agreement, payment to a micro or small enterprise must be made within the agreed date, capped at 45 days. Where there is no written agreement, the limit is 15 days. If the buyer misses this window, the deduction for that purchase is deferred to the year in which the payment is finally made, not the year the liability was incurred.
- The rule applies only to micro and small enterprises, not medium enterprises.
- It applies only to suppliers of goods or services registered under the MSMED Act (Udyam registered).
- Traders are generally outside the definition of manufacturer or service provider for this benefit.
What Buyers Must Do
The compliance burden falls largely on buyers. A missed deadline directly increases taxable profit for the year, hurting cash flow at assessment time.
- Identify your MSME vendors: Collect Udyam registration numbers and classification (micro, small, or medium) from all suppliers.
- Update your accounting system: Flag micro and small vendor invoices so payment ageing can be tracked automatically.
- Prioritise payments: Ensure micro and small supplier dues are cleared within 15 or 45 days as applicable.
- Document agreements: Keep written contracts specifying payment terms within the statutory ceiling.
What Suppliers Must Do
Suppliers benefit from the rule but should take active steps to secure their position. Registering under Udyam is the first and most important action, because the protection only applies to registered enterprises. Suppliers should mention their Udyam registration number and MSME classification clearly on every invoice, and maintain a record of payment due dates so overdue amounts can be pursued, including the interest payable under the MSMED Act.
"Section 43B(h) turns timely payment into a tax question, not just a relationship question. Buyers who ignore it effectively lend the tax department their working capital."
Practical Steps to Stay Compliant
Getting this right is largely a matter of process discipline. A vendor master that captures MSME status, a payment ageing report reviewed monthly, and a clear internal policy on prioritising small supplier dues will keep most businesses safe. Our business advisory services help companies set up exactly these controls and reconcile MSME balances before year-end.
Key Takeaways
- Payments to Udyam-registered micro and small enterprises must be made within 15 days, or up to 45 days with a written agreement.
- Late payment defers the tax deduction to the year of actual payment, raising current-year taxable income.
- Buyers should capture MSME status in their vendor master and prioritise these payments.
- Suppliers should register under Udyam and display their classification on every invoice.
If you are unsure how Section 43B(h) affects your books this year, do not wait until filing season. Contact KSY Associates for a review of your MSME payables and a compliant process to manage them.