Section 43B(h) of Income Tax Act: MSME Payments, Applicability & Deduction Timeline Explained

Introduction

Section 43B(h) of the Income Tax Act introduces vital compliance measures for businesses engaging with Micro and Small Enterprises (MSMEs) in India. Under this provision, any sum owed to MSMEs for goods or services is deductible in the same financial year only if paid within the deadline set by the MSMED Act, 2006. Payments made after the prescribed period are deductible in the year of actual payment, significantly impacting financial planning and tax liability for businesses.

What Does Section 43B(h) Mean for Businesses?

Section 43B(h), introduced from April 1, 2024, ensures prompt payment to MSMEs and discourages delayed settlements. If an enterprise buys goods or avails services from an MSME registered under the MSMED Act, the law mandates payment within 45 days (or the specific period agreed, not exceeding 45 days, as per any written contract). If no written agreement exists, the buyer must make the payment within 15 days. Businesses can only claim the tax deduction in the year they actually pay the expense, not when they incur it.​

For example, if an enterprise purchases goods from an MSME on March 2025 but pays in June 2025, the expense is deductible in FY 2025-26, not FY 2024-25. These rules apply regardless of the accounting method used, making compliance truly universal for every business.

Applicability and Exclusions

• Section 43B(h) is applicable only to payments made to genuine manufacturing and service MSMEs registered under the MSMED Act.
• It is not applicable to traders, as per office memorandums and the Act’s definition.
• Buyer registration under MSMED is not mandatory, but supplier registration as MSME is required for applicability.
• Businesses can use the Udyam registration portal to verify the supplier’s MSME status.

Interest and Deduction Rules

If payment is delayed beyond the MSMED Act’s deadline:

• The buyer must pay compound interest at three times the RBI’s bank rate on outstanding dues.
• Importantly, this interest is not allowed as a tax-deductible expense under the Income-tax Act.

Compliance Checklist for Businesses

• Track the due date for every MSME invoice as per Section 15 of the MSMED Act.
• Ensure payments are made within 15 days (if no agreement) or as per the written agreement, but not exceeding 45 days.
• Late payments mean deductions are allowed only in the year of the actual payment, not the year of expense.
• Report outstanding dues to MSMEs in Form 3CD (Tax Audit Report), and add disallowed expenses back to taxable income when filing ITR.​

MSME Definitions

• Micro Enterprises: Investment in plant/machinery ≤ ₹1 crore, turnover ≤ ₹5 crore.
• Small Enterprises: Investment in plant/machinery ≤ ₹10 crore, turnover ≤ ₹50 crore.

Deduction Allowed Based on Payment Date

Instafiling Recommendations

At Instafiling, proactive compliance ensures your business stays penalty-free and maintains positive vendor relationships. Our team helps you automate MSME invoice tracking, adhere to Section 43B(h) timelines, and prepare accurate audit reports for your tax filings. For seamless expense deductions and streamlined working capital management, connect with Instafiling and let our experts guide your payment and compliance strategy.

Conclusion

Section 43B(h) enforces timely payments to MSMEs for tax deduction eligibility and penalizes late payments with interest and deferred deduction. Instafiling’s technology ensures businesses stay compliant, safeguard deductible expenses, and maintain smooth vendor operations. For updates, registration, and MSME compliance support, reach out to Instafiling’s experts today.

Frequently Asked Questions

1. What is Section 43B(h) of the Income Tax Act?

Section 43B(h) mandates that payments made to Micro and Small Enterprises (MSMEs) are only deductible in the financial year if paid within 15 days (no written agreement) or 45 days (with agreement) as per the MSMED Act. Delayed payments are deductible only in the year of actual payment.

2. From when is Section 43B(h) applicable?

This clause is effective from April 1, 2024, and applies from Assessment Year 2024-25 onwards.

3. Who is affected by this provision?

Large enterprises and buyers dealing with registered Micro and Small Enterprises must ensure compliance with Section 43B(h) regardless of their own MSMED Act registration status.

4. What happens if payment to MSMEs is delayed?

Late payments attract compound interest at three times the RBI bank rate, and the interest paid is not tax-deductible. The original expense deduction is postponed to the year when payment is made.

5. Are traders covered under Section 43B(h)?

No, the provision applies only to manufacturers and service providers registered as MSMEs, not to traders.

6. How is the payment deadline determined if there is no written agreement?

If no agreement exists, payment must be made within 15 days of acceptance of goods or services.

7. What if there is a written agreement specifying payment terms?

Payment timelines as per the agreement apply, but cannot exceed 45 days from acceptance.

8. How can one verify if a supplier is a registered MSME?

Businesses can verify MSME registration status via the Udyam Registration portal using the supplier’s registration number.

9.Is advance payment to MSMEs deductible under Section 43B(h)?

Yes, advance payments made to MSMEs are deductible in the year of payment, even if not due.

10.What are the compliance requirements?

Businesses need robust tracking systems, clear contractual agreements, and regular audit checks to ensure MSME payments meet the stipulated deadlines and avoid disallowance of deductions.