For decades, large corporates and their finance teams managed cash flow partly by stretching payment timelines to their smallest suppliers — the MSMEs, the component makers, the job workers, the service providers operating on thin margins. That strategy became significantly more expensive from AY 2024-25, when Section 43B(h) of the Income Tax Act came into force.
What was once a commercial arrangement between buyer and supplier is now directly linked to your income tax deduction. Pay late, and the deduction moves. Pay very late, and it may never come — at least not in the year you want it.
What Section 43B(h) Says
Section 43B of the Income Tax Act lists payments that are only deductible on actual payment rather than on accrual. The original provisions covered taxes, provident fund contributions, bonus, and similar statutory payments. Budget 2023 added clause (h): any sum payable to a micro or small enterprise for goods or services.
Under this provision, such payments are deductible only if made within the time limits specified in the MSMED Act, 2006 — which mandates:
- 45 days from the date of acceptance of goods/services if there is a written agreement specifying a payment period.
- 15 days from the date of acceptance if there is no written agreement.
If payment is made beyond these deadlines, the deduction is deferred to the year of actual payment. There is no catch-up mechanism — the expense simply does not reduce your taxable income in the year it was incurred.
Who Is a Micro or Small Enterprise?
Under the MSMED Act (as revised in 2020), a Micro Enterprise has investment in plant/machinery up to ₹1 crore and turnover up to ₹5 crores. A Small Enterprise has investment up to ₹10 crores and turnover up to ₹50 crores. If your vendor falls within these thresholds and is registered on the Udyam portal, they are an MSME for Section 43B(h) purposes.
The Hidden Trap: Unregistered Vendors
In Advisory Note by ICAI (2024), the Institute clarified that Section 43B(h) applies regardless of whether the MSME vendor is Udyam-registered or not — what matters is whether the vendor qualifies as a micro or small enterprise by size, not by registration status. This has significant implications: a buyer who has not verified vendor status cannot simply assume the provision does not apply.
Three Practical Takeaways
- Build a vendor MSME register immediately. For every supplier of goods or services, obtain their Udyam registration number or a self-declaration of their MSME status. Update this register annually, as vendors can cross thresholds as they grow.
- Configure your ERP to flag MSME invoices at 15 and 45 days. The payment clock starts at acceptance of goods — not the invoice date. If you cannot pay within 45 days, at least flag the invoice for a CFO-level decision so the tax impact is knowingly taken.
- Review year-end payables before 31 March. Any MSME payable outstanding beyond the 45-day limit at year-end will be disallowed this year. Clearing these before year-end saves you the deferral and the corresponding advance tax liability.
Quick Quiz
A company receives goods from an MSME vendor on 1 February 2026. There is no written payment agreement. The payment is made on 20 March 2026. Is the expense deductible in AY 2026-27?
A) Yes — payment was made before 31 March B) No — payment was due by 16 February (15 days) and was late C) Yes — the 45-day rule applies in all cases D) No — MSME payments are never deductible on accrual