Section 43B(h) — MSME Payment Rule: Impact on Buyers & Sellers

What Section 43B(h) Says

Effective from FY 2023-24 (AY 2024-25), Section 43B(h) of the Income Tax Act disallows deduction for payments due to Micro and Small Enterprises unless the payment is made within the time limits prescribed under Section 15 of the MSMED Act 2006. The MSMED Act mandates payment within 45 days where there is a written agreement, or 15 days where there is no agreement.

Who Is Affected?

Any entity (buyer) that purchases goods or services from a supplier registered as a Micro or Small Enterprise under the MSMED Act and has outstanding payables beyond the MSMED timelines will face a deduction disallowance for the unpaid amount in that financial year. The disallowance reverses only in the year of actual payment.

• Applies to buyers of all sizes — large corporates, SMEs, and even individuals in business
• Sellers must be Micro or Small Enterprise (not Medium)
• Payment must be within 15 days (no agreement) or 45 days (with written agreement)
• Disallowed expense is added back to income; deductible in the year of payment

Practical Impact

For buyers with significant MSME vendor payables — particularly in manufacturing, retail, and construction — this provision can cause a large deduction disallowance at year-end, increasing taxable income and advance tax liability. The fix is systematic: update your vendor master to flag registered MSME suppliers, set payment alerts, and renegotiate credit terms within MSMED limits.

What You Need to Do by March 31

Before the financial year ends, reconcile all outstanding payables to MSME vendors. If you cannot make payment, consider whether the payable can be reclassified or whether a written agreement can adjust credit terms within the 45-day window. Your CA should review MSME vendor balances as part of the year-end tax planning exercise.