Section 43B(h): MSME Payment Timelines and Practical Considerations

The Finance Act, 2023 inserted clause (h) in section 43B of the Income-tax Act, 1961, with effect from assessment year 2024-25. The amendment converted what was earlier a 'paid' check into a hard payment-timeline rule: amounts payable to micro and small enterprises (registered under the MSMED Act, 2006) are deductible only if paid within the period specified in section 15 of the MSMED Act.

Who is covered

The provision applies only to micro and small enterprises registered under the MSMED Act. Medium enterprises are outside the scope, as are unregistered entities. Practically, this means buyers must verify the supplier's MSME registration status before relying on payment terms.

The timeline rule under MSMED Act, section 15

The maximum permissible period is:

• 15 days from the date of acceptance, where there is no written agreement, or
• The agreed period, where there is a written agreement — but in no case more than 45 days.

Consequences of late payment

If payment is made after the section 15 timeline, the deduction is deferred to the year of actual payment. This can create significant tax timing issues for the buyer, particularly where:

• Year-end accruals to MSME suppliers are paid only in the next financial year
• Disputes over invoices delay payment beyond the 45-day window
• The buyer's cash position requires extended credit terms

Practical action items

Buyers should consider the following operational steps:

• Identify MSME vendors in the master vendor file. Request Udyam Registration certificates and update status periodically.
• Update procurement contracts to align payment terms with the 45-day cap for MSME vendors. Standard NET-60 or NET-90 terms are not enforceable against the section.
• Year-end review: identify MSME payables outstanding beyond 45 days and either pay them before year-end or accept the deferred deduction.
• Tax audit reporting under Form 3CD requires disclosure of disallowance under section 43B(h).

Open questions

Practitioners continue to debate edge cases — including treatment where there is a bona fide dispute over the invoice amount, the interaction with section 16 of the MSMED Act (interest on late payment), and the application of section 43B(h) to capital-account items reclassified as revenue. Each engagement may require a specific position based on facts.

This note is for general information only and does not constitute professional advice. Specific advice should be obtained on the application of section 43B(h) to particular transactions.