Section 43B(h): The 45-Day MSME Payment Rule That Has No Escape Clause

Section 43B of the Income-tax Act has a familiar shape: certain expenses are deductible only on actual payment, but if you pay before the due date for filing the return, the deduction survives in the year of accrual. Provident fund, gratuity, statutory dues, bank interest — all work that way.

Clause (h), inserted by the Finance Act, 2023 and effective from assessment year 2024-25, breaks the pattern. It carries no such relief. If the payment is late by the standard the MSMED Act sets, the expense is disallowed in the year it accrued, full stop, and comes back only in the year the money actually moves.

For a business with a large payables book and a lot of small suppliers, that is a real and recurring tax cost sitting inside the purchase ledger.

What the clause says, and what it borrows

Clause (h) denies deduction for any sum payable to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006.

Section 15 of the MSMED Act sets the limit as follows:

• where there is no agreement as to the date of payment: on or before the appointed day, being the day following immediately after the expiry of fifteen days from the day of acceptance or deemed acceptance;
• where there is an agreement: the date agreed, but in no case later than forty-five days from the day of acceptance or deemed acceptance.

So "45 days", as the rule is usually shorthanded, is the ceiling, available only where there is an agreement. Without one the clock is 15 days.

"Acceptance" has its own meaning: delivery of goods or rendering of services, read with any objection raised in writing within fifteen days. Deemed acceptance is where no objection is raised in that window. The practical consequence is that the clock usually starts on delivery, not on invoice date and not on invoice receipt.

Why it behaves differently from the rest of Section 43B

Compare the two:

The proviso to Section 43B, which rescues the other clauses, does not extend to clause (h). An expense accrued in the year ended 31 March and paid to a micro or small supplier in May — comfortably before the return due date — is still disallowed for that year if the MSMED deadline had passed.

That single asymmetry is what makes this provision bite, and it is what most year-end checklists built before assessment year 2024-25 do not handle.

Who counts

The classification is on the composite criteria of investment in plant and machinery or equipment and turnover, as notified under the MSMED Act:

• micro — investment up to the micro threshold and turnover up to the micro turnover limit;
• small — investment and turnover up to the small thresholds;
• medium — the next band, and outside clause (h).

The thresholds have been revised, so verify the current notified limits rather than relying on a figure from an older note. What matters procedurally is simpler than the arithmetic: the enterprise's Udyam Registration Certificate states its category, and that certificate is the document you want on file.

Three practical points:

• an enterprise that qualifies but has not registered under Udyam is not within the Section 15 machinery in the same way, and the better view is that clause (h) does not catch it — but this has been contested, so take a position deliberately and consistently;
• the classification is as at the time of supply. A supplier who moves from small to medium changes the answer for later supplies;
• clause (h) addresses goods supplied and services rendered. It is not a rule about every payment to an MSME, so a loan repayment or a capital transaction is a different question.

What it costs, concretely

Take a manufacturer with ₹40 crore of annual purchases, of which ₹12 crore is from micro and small suppliers, and assume an average 20% of that is paid beyond the limit. That is ₹2.4 crore of expenditure disallowed in the year of accrual.

At a company rate of roughly 25%, that is ₹60 lakh of tax brought forward by a year — paid now, recovered when the suppliers are paid. It does not change lifetime tax. It changes this year's cash, and it does so every year that the payables behaviour stays the same.

There is a second-order effect worth noting. The MSMED Act separately provides for interest at three times the bank rate, compounded monthly, on amounts paid beyond the appointed day, and that interest is itself not deductible. The tax disallowance is not the only consequence of a slow payables cycle.

Where it goes wrong in practice

• Nobody records the supplier's category. The vendor master has a GSTIN and a PAN and nothing about MSME status, so at year end the finance team cannot identify the affected balances at all.
• The clock is measured from the invoice date. It runs from acceptance — generally delivery — which is often earlier.
• Purchase orders are silent on payment terms, leaving the company on 15 days when 45 was available for the asking.
• The year-end sweep assumes the 43B proviso applies. Payments made in April and May are treated as having cured the default. They have not.
• The tax auditor finds it, not the company. Form 3CD requires disclosure of amounts covered by clause (h), so it will surface. Discovering it during the audit leaves no time to pay.
• MSME-1 is not reconciled to the tax position. The half-yearly MSME-1 return under the Companies Act reports dues to micro and small enterprises outstanding beyond 45 days. If MSME-1 shows balances and the tax computation shows no 43B(h) disallowance, the two filings contradict each other.

How to run it properly

1. Collect Udyam certificates at onboarding and at renewal, and store the category — micro, small or medium — as a field in the vendor master, not as a PDF nobody queries.
2. Put payment terms in the purchase order. Any period up to 45 days, in writing.
3. Date the clock from delivery. Capture the goods receipt or service completion date, and raise any objection in writing within fifteen days where there is one — that is what preserves the deemed-acceptance position.
4. Report monthly, not annually. An ageing of micro and small payables, with days computed from acceptance, reviewed every month.
5. Prioritise this bucket in the payment run. A micro supplier at day 40 should be paid ahead of a medium supplier at day 80. That is a treasury policy decision and it needs to be made explicitly.
6. Reconcile MSME-1 to the tax computation each half year, so the two agree.
7. Compute the clause (h) disallowance yourself before the auditor does, as part of closing the year.

The provision is not difficult to comply with. It is difficult to comply with retrospectively, which is why it belongs in the vendor master and the payment run rather than in the tax file.