Introduction
With the growing focus on protecting Micro and Small Enterprises (MSMEs), the Finance Act, 2023 introduced a significant change to the Income Tax Act — the insertion of Section 43B(h).
This section directly affects businesses that buy goods or services from MSMEs. If payment is delayed beyond the prescribed time, the related expense will not be allowed as a deduction in that financial year, potentially increasing the taxable income and tax liability.
What Is Section 43B(h) of the Income Tax Act?
- Section 43B generally allows certain expenses to be claimed as deductions only when actually paid.
- Clause (h), introduced in 2023, states that payments to Micro or Small Enterprises will be allowed as deductions only if made within the timeline defined under the MSMED Act, 2006.
- If payment is not made within the prescribed period, deduction is not allowed for that financial year, even if the amount is paid later.
Time Limits for MSME Payments Under MSMED Act
As per Section 15 of the MSMED Act, 2006:
- If there is a written agreement, payment must be made within 45 days.
- If no agreement exists, payment must be made within 15 days.
- Failure to meet these deadlines results in disallowance of the expense for deduction in that financial year.
Who Is Affected by Section 43B(h)?
Applies to:
- Any business purchasing goods or services from Micro or Small Enterprises
- Businesses claiming these purchases as deductions in the Profit and Loss Statement
- Taxpayers reporting income under the head Profits and Gains of Business or Profession
What Do You Need to Do as a Buyer?
To stay compliant:
- Identify vendors who are registered MSMEs on the Udyam portal.
- Collect and verify Udyam Registration Certificates from vendors.
- Track payment timelines for every MSME invoice:
- 15 days if no agreement
- 45 days if agreement exists
- Ensure all payments are cleared by 31st March to claim deductions in that financial year.
- Maintain an internal compliance tracker to monitor all dues and deadlines.
Example to Understand Section 43B(h)
Scenario:
- You purchase goods worth Rs. 5,00,000 on 15 January 2025 from a registered small enterprise.
- No agreement exists, so the due date is 30 January 2025.
- Payment is made on 25 April 2025.
Result:
- Payment was made after the financial year ended (31 March 2025).
- Therefore, Rs. 5,00,000 will not be allowed as a deduction in FY 2024–25.
- The deduction will only be allowed in FY 2025–26, when payment was actually made.
Frequently Asked Questions
Is Section 43B(h) applicable to medium enterprises?
No. This section is applicable only to Micro and Small Enterprises. Medium enterprises are not covered.
What if the MSME does not have Udyam Registration?
Then Section 43B(h) does not apply. Only vendors registered on the Udyam portal are considered.
Is Section 43B(h) applicable under both tax regimes?
Yes. It applies regardless of whether the old or new tax regime is selected.
What if I make payment in April but within 45 days?
If payment is made after 31 March, the deduction is deferred to the next financial year — even if made within 45 days.
Common Mistakes to Avoid
- Not maintaining a record of MSME status for vendors
- Assuming Udyam registration is optional for compliance
- Delaying payments and still claiming deduction in the same year
- Applying 45-day limit without a written agreement (it should be 15 days)
MSME Definition as Per Udyam Registration
Micro Enterprise
- Investment in plant and machinery or equipment: Up to Rs. 1 crore
- Turnover: Up to Rs. 5 crore
Small Enterprise
- Investment: Up to Rs. 10 crore
- Turnover: Up to Rs. 50 crore
Only businesses registered under these thresholds on the Udyam portal are considered for Section 43B(h) compliance.
Final Thoughts from a Chartered Accountant
Section 43B(h) is a compliance-driven provision that aims to ensure MSMEs are paid on time.
For businesses, this is no longer just a vendor payment issue, but a tax deduction and cash flow matter.
Late payments can now lead to increased tax liability.
To stay compliant:
- Set up payment alerts
- Maintain updated vendor MSME status
- Monitor cut-off dates for each transaction
Need Help Ensuring Section 43B(h) Compliance?
At CallmyCA, we assist businesses to:
- Review and classify vendors under MSME
- Set up automated compliance tracking systems
- Ensure timely deduction and accurate tax filing
- Avoid disallowances under Section 37 or Section 43B
Click here to book your MSME and tax compliance service via CallmyCA
