If you’ve ever dealt with MSMEs, you already know that delayed payments can make or break small businesses. Section 43H of the Income Tax Act directly addresses this concern. It ensures that when a taxpayer or business purchases goods or services from Micro and Small Enterprises, the payment for those transactions is made within the timeline prescribed under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006.
The intent is simple yet powerful — to prevent liquidity crunch for small businesses. This provision not only protects MSMEs but also pushes larger companies to follow fair & timely practices. It’s a way of linking tax benefits with ethical business behaviour.
The Core Provision – What Section 43H Says
Section 43H applies when any sum is owed to Micro & Small enterprises for goods supplied or services rendered. Businesses can claim deductions for these payments only when the payment has actually been made. If there’s a delay beyond the due date prescribed under the MSMED Act, the deduction for that expense is disallowed in the year of accrual.
This essentially means — if you owe money to an MSME and don’t pay within the allowed period, you can’t reduce that expense from your taxable income until you finally pay it. So, delayed payments can directly hit your profit and loss account during tax computation.
Who Falls Under This Section?
This section is applicable on payments to MSEs—specifically Micro and Small Enterprises registered under the MSMED Act. It does not cover Medium Enterprises yet. The law defines these businesses based on their investment & turnover criteria.
If a supplier holds a valid Udyam Registration Certificate as a Micro or Small Enterprise, then any buyer (assessee) purchasing goods or services from them becomes liable to make payment within the specified time."
So, if your vendor has registered under MSME & you delay payments beyond the due date — Section 43H will come into play.
Also Read: MSME Payments, Compliance & Tax Implications
Why Timely Payment Matters for Businesses
From a compliance perspective, the biggest consequence is loss of deduction. But from a business perspective, it’s also about reputation & supplier trust. The law mandates timely payment to MSMEs for tax deduction eligibility, but that’s just one layer.
Timely payments also ensure uninterrupted supply, smoother business relationships, and avoid interest penalties under the MSMED Act (which can be as high as three times the bank rate).
For large businesses, delayed payment may not pinch the cash flow immediately. But for small units, it can affect salaries, raw material purchases, and production cycles. Section 43H ensures that the cash keeps flowing where it’s needed most — to the small enterprise sector that powers India’s manufacturing backbone.
How Deductions Work Under Section 43H
Let’s take a practical example.
Suppose your company buys goods worth ₹5,00,000 from a registered small enterprise. The due date for payment, as per MSME terms, is 45 days.
- If you pay within 45 days → The expense is allowed as a deduction in the same financial year.
- If you pay after 45 days → The deduction will be disallowed in the year of accrual & allowed only in the year of actual payment.
This aligns with the concept that only timely payments to MSMEs can reduce your taxable income.
So even though the expense is genuine, tax law disincentivizes delay by deferring deduction.
Section 43H and MSME Act – The Interconnection
The Income Tax Act borrows the definition and payment timelines from the MSMED Act, 2006. Section 43H acts as a bridge between tax compliance & MSME protection.
Under the MSME Act, the buyer must make payment:
- Within 15 days from acceptance of goods/services, or
- Within 45 days, if both parties have agreed in writing.
If this payment window is breached, the buyer not only loses tax deduction under Section 43H but may also have to pay interest on delayed payment under the MSME Act.
This dual-penalty system — tax disallowance and interest — makes it financially smarter to stay compliant.
Government’s Intention Behind Introducing Section 43H
The government’s goal is not just to collect taxes but to ensure a fair business ecosystem. Micro & Small Enterprises often face huge delays in payments, especially from larger corporations. Section 43H creates a deterrent effect by linking timely payments with tax deductions.
It’s a way of using the tax system as a behavioral nudge — rewarding prompt payers and penalizing habitual delayers. This change came in line with the government’s broader “Vocal for Local” and MSME support initiatives.
Practical Impact on Taxpayers
Here’s how Section 43H affects different stakeholders:
- For Businesses: They need to plan working capital more efficiently to clear dues on time.
- For MSMEs: It ensures better liquidity & predictable cash flow.
- For Accountants and CAs: It adds another layer of verification while finalizing books — checking MSME vendor status & payment timelines.
Many companies have already started revising their vendor master lists to identify registered MSMEs & monitor payment cycles more closely.
Also Read: MSME Payment Rule Every Business Must Know
Compliance Tips for Businesses
- Verify MSME Registration: Always collect Udyam Registration Certificates from your suppliers.
- Automate Payment Reminders: Use accounting software to flag pending MSME dues.
- Document Payment Terms Clearly: Written agreements help determine due dates accurately.
- Update Finance Teams: Ensure they’re aware that delayed payments may cause tax disallowance."
- Consult Your CA Regularly: Even a small mistake here can lead to significant disallowance in your tax filings.
In a Nutshell
Section 43H has changed how businesses approach payments to small vendors. It’s not just about compliance anymore — it’s about respect for small businesses & accountability in trade practices.
The message is clear: make payments to MSMEs on time, or lose the tax benefit.
Final Word
Section 43H of the Income Tax Act might seem like a small clause, but its impact is massive. It brings discipline, transparency, and fairness in business payments. By ensuring timely settlement of dues, it strengthens India’s MSME ecosystem — the real growth engine of the economy.
If you’re unsure how this applies to your business or need help reviewing your MSME compliance, connect with our experts at Callmyca.com — your trusted partner for tax, compliance, and business advisory.
