Introduction
From April 1, 2024, a major compliance rule has come into force under Section 43B(h) of the Income Tax Act. This provision directly impacts businesses that purchase goods or services from MSMEs.
The core idea is simple but powerful:
If you don’t pay MSMEs on time, you cannot claim that expense as a tax deduction.
This has made timely payment (within 15 days or 45 days) extremely important for all businesses.
What is Section 43B(h)?
Section 43B(h) states that:
- Any amount payable to a Micro or Small Enterprise (MSME)
- Will be allowed as a deduction only if paid within the prescribed time limit
If payment is delayed:
Deduction is disallowed in the same financial year and will be allowed only in the year of actual payment
Applicability of Section 43B(h):
This section applies when:
✔ You purchase goods/services from registered MSMEs
✔ Supplier is Micro or Small Enterprise
Not applicable when:
Supplier is a Trader (wholesale/retail)
MOST IMPORTANT: MSME Payment Time Limit (15 Days / 45 Days Rule)
This is the heart of the law
1. If NO Written Agreement – Payment must be made within 15 days
2. If Written Agreement Exists- Payment can be made within agreed time but the maximum credit period cannot exceed 45 days.
What Happens If You Pay Late?
| Situation | Tax Treatment |
| Payment within 15/45 days | Expense allowed in same year |
| Payment after 15/45 days | Expense disallowed |
| Paid later (next year) | Allowed in that year |
This means your taxable income will increase if payment is delayed.
Important: Deduction shifts from accrual basis → payment basis
MSME Classification (w.e.f. 1st April 2025)
| Type | Investment | Turnover |
| Micro | ≤ ₹2.5 Cr | ≤ ₹10 Cr |
| Small | ≤ ₹25 Cr | ≤ ₹100 Cr |
Only Micro & Small Enterprises are covered
Interest on Delayed Payment
If payment is delayed:
- Interest = 3× RBI bank rate (compound)
- Interest is NOT allowed as deduction
Why has Government Introduced This Rule?
The objective is:
✔ Ensure timely payments to MSMEs
✔ Improve their cash flow
✔ Reduce working capital issues
Steps to be taken to ensure there is no disallowance of expenses:
1. Track MSME Vendors
- Maintain list of MSME suppliers
- Collect Udyam Registration
2. Monitor Payment Deadlines
- 15 days (no agreement)
- 45 days (with agreement)
3. Year-End Check
Outstanding beyond limit on 31 March = Disallowance
4. Update Accounting System
- Shift focus to payment tracking
- Not just booking expenses
Major Impact on Businesses
Cash Flow Pressure – Companies must pay faster
Increased Tax Liability – Delayed payments = higher taxable income
Compliance Burden – Need for proper tracking & documentation
Final Conclusion
Section 43B(h) has changed the way businesses deal with MSMEs.
Earlier: Expense allowed on booking (accrual basis)
Now: Allowed only if paid within 15/45 days