Section 43B(h) Explained: Why Your Buyers Now Want to Pay MSMEs Within 45 Days
FundRaksha Team · For years, the 45-day payment rule in the MSMED Act was widely known and widely ignored. The Finance Act, 2023 changed the incentive. It inserted clause (h) into Section 43B of the Income-tax Act, 1961, and since then paying a small supplier late can cost the buyer real money in tax.
If you are a supplier, this is one of the most useful facts to bring into a payment conversation. If you are a buyer, it belongs in your payables process.
What Section 43B(h) says
Section 43B lists certain expenses that are deductible only when they are actually paid, not merely when they are booked. Clause (h) adds:
Any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the MSMED Act.
Put simply: if a business owes money to a micro or small enterprise and does not pay within the time allowed by Section 15 of the MSMED Act (the agreed date, capped at 45 days from acceptance, or 15 days if nothing was agreed), then that expense is not deductible in the year it was booked. It becomes deductible only in the year it is actually paid.
The provision applies from assessment year 2024-25, that is, for the financial year 2023-24 onwards.
Why it bites harder than other 43B items
Most Section 43B items, such as certain taxes and employee contributions, are allowed if paid before the due date of filing the income tax return. That relief does not apply to clause (h). A payment to a micro or small supplier made after the MSMED Act deadline is simply pushed to the year of payment, even if it is made a few days after the year ends.
For a buyer with large year-end payables, this can meaningfully increase taxable income, and tax, for that year.
Who is covered
- Buyers: any business claiming a deduction under the Income-tax Act, whatever its own size.
- Suppliers: only micro and small enterprises that are registered (Udyam). Medium enterprises are not covered.
- Traders: retail and wholesale traders can register on Udyam, but that registration is for priority-sector lending. The delayed-payment protections of the MSMED Act, and therefore Section 43B(h), are generally understood not to extend to them. Buyers typically confirm the supplier's Udyam category before applying the rule.
Remember too that interest payable under Section 16 of the MSMED Act for delayed payment is not deductible for the buyer at all (Section 23 of the MSMED Act).
What suppliers should do
- Keep your Udyam registration current and share the certificate with every buyer. Buyers can only apply the rule if they know you are a micro or small enterprise.
- Put payment terms in writing. State the credit period (45 days or less) on your quotation, purchase order acceptance and invoice.
- Print it on the invoice. A short line such as "Supplier is a registered micro/small enterprise (Udyam No. …). Payment is due within 45 days of acceptance under Section 15 of the MSMED Act." reminds accounts teams at the right moment.
- Follow up before year-end. Buyers are most receptive in February and March, when they are closing their books. A polite reminder that late payment affects their deduction is a powerful nudge.
- Escalate if needed. If a buyer still does not pay, you can file on MSME Samadhaan, and interest at three times the RBI bank rate runs in your favour.
What buyers should do
- Identify which suppliers are micro or small and ask for their Udyam certificates.
- Track acceptance dates, not just invoice dates, for those suppliers.
- Build a payables calendar so that MSE invoices are paid within the agreed period, and never beyond 45 days.
- Review year-end payables to MSEs before closing the books, because the deduction impact is now direct.
The bigger picture
Section 43B(h) turns on-time payment to small suppliers from a moral obligation into a financial one. For MSMEs, it is leverage. For buyers, it is a reason to clean up payables. Either way, the businesses that manage credit well come out ahead.
FundRaksha Collect automates reminders and payment mandates so invoices are paid on time. If a buyer still delays, FundRaksha Legal can send a formal notice and prepare an MSME Samadhaan filing, with no upfront fee. And for clean, GST-ready invoices that carry your payment terms, try FundRaksha Book.
This article is general information, not tax or legal advice. Tax treatment depends on your facts; consult your CA, or talk to FundRaksha Tax.