Section 43B(h) MSME 45-day payment disallowance — impact on buyers FY 2025-26

💼 Section 43B(h) MSME 45-Day Payment Disallowance — Impact on Buyers FY 2025-26

The Section 43B(h) MSME payment rule has become an important year-end tax compliance requirement for businesses purchasing goods or services from Micro and Small Enterprises.

For FY 2025-26 (1 April 2025 to 31 March 2026), buyers need to carefully review their outstanding dues to eligible Micro and Small Enterprise suppliers because payments made beyond the time prescribed under the MSMED Act, 2006 can affect the timing of tax deduction. 📊

The provision was introduced with effect from 1 April 2024 and continues to apply for FY 2025-26.

🔎 What Is Section 43B(h)?

Section 43B(h) provides that certain amounts payable by a taxpayer to a Micro or Small Enterprise beyond the time limit specified under Section 15 of the MSMED Act, 2006 are allowed as a deduction for income-tax purposes only in the year in which the amount is actually paid.

In simple terms:

Late payment to an eligible MSME can result in the expense being disallowed for the current financial year.

This is particularly important for businesses following the mercantile/accrual system of accounting.

⏰ What Is the 15-Day / 45-Day Rule?

The MSMED Act provides two important timelines.

1️⃣ No Written Agreement — 15 Days

Where there is no written agreement between the buyer and the supplier regarding payment, payment is required within the statutory period linked to acceptance/deemed acceptance, with the appointed day being after the expiry of 15 days from acceptance or deemed acceptance.

2️⃣ Written Agreement — Maximum 45 Days

Where there is a written agreement specifying the payment period, the agreed period cannot exceed 45 days from the relevant acceptance/deemed-acceptance date.

Therefore:

Written agreement → Maximum 45 days

No written agreement → 15-day statutory timeline

📌 The 45-day period is not a general grace period available to every buyer.

🧾 Who Is Covered?

The rule is relevant where the supplier is an eligible Micro or Small Enterprise covered by the MSMED Act.

The Ministry of MSME’s guidance states that delayed-payment provisions apply to Micro and Small Enterprises and that eligible MSE suppliers can pursue delayed-payment claims under the MSMED framework.

⚠️ Important Distinction

The provision specifically concerns Micro and Small Enterprises.

Therefore, businesses should not simply treat every vendor having an “MSME” or Udyam-related status as automatically covered without checking the supplier’s classification.

🏢 Does It Apply to Service Providers?

Yes.

The MSMED delayed-payment framework covers supplies of goods as well as services by eligible Micro and Small Enterprises.

Therefore, buyers should review not only:

📦 Raw material suppliers

📦 Manufacturers

📦 Traders covered under the relevant provisions

but also eligible service providers such as:

💻 IT service providers

📊 Consultants

🛠️ Maintenance providers

📣 Marketing agencies

👨‍💼 Professional service providers

subject to the supplier satisfying the applicable MSMED conditions.

💰 How Does Section 43B(h) Affect the Buyer?

This is the most important part.

Suppose a company purchases services worth:

₹10,00,000

from an eligible Micro or Small Enterprise.

The expense is recorded in FY 2025-26, but the payment is not made within the applicable MSMED payment period.

The amount can become disallowable for FY 2025-26 under Section 43B(h).

Result:

Accounting expense: ₹10,00,000

Tax deduction in FY 2025-26: ❌ Deferred

The amount becomes deductible in the year in which the payment is actually made, subject to the applicable statutory conditions.

📅 Example — Payment Within 45 Days

Invoice/acceptance date:

1 March 2026

Written agreement:

Payment within 45 days

Payment made:

25 March 2026

If the payment is within the applicable statutory period, the Section 43B(h) timing issue would generally not arise merely because the invoice remains outstanding for part of the year.

⚠️ Example — Payment After the Permitted Period

Suppose:

Invoice/acceptance: 1 March 2026

Eligible MSME supplier: Yes

Written agreement: Yes

Payment terms: 45 days

Payment made: 30 April 2026

The buyer needs to examine whether the payment crossed the statutory 45-day limit.

If the amount falls within Section 43B(h) and remains unpaid beyond the prescribed period, the deduction is deferred.

Therefore:

Expense booked in FY 2025-26 → Deduction may be deferred

Payment in FY 2026-27 → Deduction generally considered in FY 2026-27

🧮 Year-End Impact for FY 2025-26

This becomes particularly important at 31 March 2026.

Businesses should prepare an MSME payable report showing:

Particular Details

Supplier Name Vendor name

Udyam Status Micro / Small / Other

Invoice Date Invoice date

Acceptance Date Actual/deemed acceptance

Agreement Yes / No

Due Date Statutory due date

Outstanding Amount ₹

Payment Date Actual payment date

Section 43B(h) Status Allowable / Deferred

This reconciliation should ideally be completed before finalising the tax computation.

🔍 How Should Buyers Identify MSME Vendors?

Businesses should not rely only on their accounting software’s vendor master.

They should obtain appropriate supplier information, including:

📄 Udyam Registration details

📄 Enterprise classification

📄 Supplier declaration, where appropriate

📄 Invoice details

📄 Agreement/payment terms

📄 Confirmation of outstanding balances

The Ministry of MSME identifies Udyam Registration as the official MSME registration framework.

📑 Why Vendor Classification Is Important

Consider a company with:

500 vendors

and total outstanding trade payables of:

₹2 crore

If management identifies only ₹20 lakh as MSME-related without properly verifying supplier classification, the tax computation may be incorrect.

Therefore, year-end review should cover:

Vendor Master → MSME Status → Invoice → Acceptance → Due Date → Payment → Tax Treatment

⚖️ Section 43B(h) vs MSMED Act

These are related but separate concepts.

MSMED Act, 2006

Primarily protects eligible Micro and Small Enterprises against delayed payments.

Section 43B(h)

Deals with the income-tax deduction timing for specified payments to such enterprises.

So, a buyer can face two different consequences:

💰 Commercial/legal consequence → Delayed payment under MSMED Act

🧾 Tax consequence → Deduction deferred under Section 43B(h)

💸 Interest on Delayed MSME Payment

The MSMED Act also provides consequences for delayed payment.

Where the buyer fails to make payment within the prescribed period, the buyer may become liable to pay compound interest with monthly rests at three times the RBI-notified bank rate on the amount due, subject to the statutory provisions.

This makes delayed payment more expensive than simply losing the immediate tax deduction.

🚨 Can the Buyer Claim the Expense in the Next Year?

Yes, where the statutory conditions are satisfied, the Section 43B mechanism generally results in a timing difference, rather than the expense permanently disappearing.

For example:

FY 2025-26

Expense booked:

₹15 lakh

Payment not made within the applicable MSMED period.

➡️ Deduction deferred.

FY 2026-27

Payment made:

₹15 lakh

➡️ Deduction can generally be claimed in the year of payment, subject to the applicable provisions.

🧾 What About Payments Made Before the Income-Tax Return Due Date?

This is an important distinction.

For several other categories covered by Section 43B, payment made up to the applicable return-filing due date can allow deduction.

However, Section 43B(h) has a specific MSME payment condition linked to the MSMED Act.

Therefore, buyers should not assume that paying an MSME supplier after 31 March but before the income-tax return filing due date automatically preserves the FY 2025-26 deduction.

This is one of the most important practical aspects of the provision.

🏦 Impact on Working Capital

Section 43B(h) can influence how businesses manage their working capital.

Earlier, a company might negotiate longer payment terms with suppliers.

Now, where the supplier is an eligible Micro or Small Enterprise, extending payment beyond the statutory period can create:

⚠️ Tax deduction deferral

⚠️ Interest exposure

⚠️ Vendor disputes

⚠️ Cash-flow pressure

⚠️ Year-end reconciliation issues

Therefore, procurement and finance teams should coordinate rather than treating MSME compliance as only an accounting issue.

📊 Impact on Financial Statements & Tax Computation

The accounting treatment and tax treatment may differ.

For example:

Books of Accounts

Expense recognised:

₹25 lakh

Tax Computation

₹25 lakh may be added back if the relevant Section 43B(h) conditions are triggered.

This creates a timing difference.

Therefore, the tax team should reconcile:

Profit as per Books → MSME 43B(h) Adjustment → Taxable Income

🧠 Practical Compliance Strategy for Buyers

Businesses can reduce year-end complications by implementing a monthly process.

Step 1 — Collect MSME Status

Obtain relevant Udyam details from suppliers.

Step 2 — Update Vendor Master

Mark eligible Micro and Small Enterprise suppliers separately.

Step 3 — Track Acceptance Date

Do not rely only on invoice date.

Step 4 — Calculate Statutory Due Date

Determine whether the 15-day or applicable agreed period applies.

Step 5 — Monitor Outstanding Dues

Create an ageing report specifically for MSME vendors.

Step 6 — Prioritise Payments

Pay eligible MSME vendors within the applicable statutory period.

Step 7 — Perform Year-End Reconciliation

Identify invoices potentially falling under Section 43B(h).

❌ Common Mistakes Buyers Make

1. Treating 45 Days as a Universal Rule

The 45-day maximum applies where there is a written agreement; where there is no written agreement, the statutory timeline is different.

2. Checking Only the Invoice Date

The MSMED framework considers acceptance/deemed acceptance concepts, including written objections within the prescribed period.

3. Ignoring Service Vendors

The provisions can cover eligible services as well as goods.

4. Checking MSME Status Only at Year-End

MSME status and transaction records should be monitored throughout the year.

5. Assuming Payment Before ITR Filing Is Sufficient

The specific Section 43B(h) rule should be applied rather than assuming the general Section 43B payment rule.

6. Not Reconciling the Tax Computation

Outstanding MSME balances should be separately reviewed before finalising the return.

📋 FY 2025-26 MSME 43B(h) Checklist

Before closing the books for FY 2025-26, businesses should verify:

☑ Identify all Micro and Small Enterprise suppliers

☑ Obtain/verify Udyam details

☑ Check written payment agreements

☑ Identify acceptance/deemed acceptance dates

☑ Calculate applicable payment deadline

☑ Prepare MSME payable ageing

☑ Identify balances unpaid beyond the permitted period

☑ Review Section 43B(h) tax adjustment

☑ Check delayed-payment interest exposure

☑ Reconcile vendor balances

☑ Maintain supporting documents

☑ Review disclosures and tax computation

🎯 Key Takeaways

The Section 43B(h) provision has changed the way businesses need to manage payments to eligible MSME suppliers.

For FY 2025-26, buyers should remember:

📌 Written agreement → Payment period cannot exceed 45 days

📌 No written agreement → Statutory 15-day framework applies

📌 Eligible Micro/Small Enterprise → Section 43B(h) needs consideration

📌 Payment beyond the permitted period → Tax deduction can be deferred

📌 Delayed payment → Separate MSMED interest exposure may arise

The safest approach is not to wait until the income-tax return is being prepared. Finance and procurement teams should maintain a separate MSME payable tracker throughout the year.

❓ Frequently Asked Questions

Does Section 43B(h) apply to Medium Enterprises?

The provision is specifically linked to payments to enterprises covered as Micro or Small Enterprises under the MSMED framework; buyers should verify the supplier’s actual classification.

Is the 45-day period mandatory?

Where a written agreement exists, the agreed payment period cannot exceed 45 days under the MSMED Act.

What if there is no written agreement?

The MSMED Act provides an appointed-day mechanism linked to 15 days from acceptance or deemed acceptance.

Does the rule apply to services?

Yes, eligible Micro and Small Enterprise suppliers providing services can also fall within the delayed-payment framework.

Is the expense permanently disallowed?

Generally, Section 43B(h) creates a timing-based disallowance: where the applicable conditions are met, the deduction can be claimed in the year in which the payment is actually made.

Can buyers avoid the issue by paying after 31 March but before filing the return?

Businesses should not assume that the general Section 43B return-filing-date relief applies to Section 43B(h). The specific MSMED payment timeline must be considered.

🏁 Conclusion

Section 43B(h) makes timely payment to eligible MSME suppliers an important tax-planning and working-capital issue for businesses.

For FY 2025-26, buyers should identify eligible Micro and Small Enterprise vendors, verify their payment terms, track acceptance dates and ensure that outstanding balances are reviewed before finalising the tax computation.

A proper MSME vendor master + ageing report + payment tracker + tax reconciliation can help businesses avoid unexpected disallowances and delayed-payment complications. 💼📊